The Returns On Capital At Samvardhana Motherson International (NSE:MOTHERSON) Don't Inspire Confidence

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Samvardhana Motherson International (NSE:MOTHERSON), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Samvardhana Motherson International, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.11 = ₹42b ÷ (₹782b - ₹392b) (Based on the trailing twelve months to September 2023).

Therefore, Samvardhana Motherson International has an ROCE of 11%. In isolation, that's a pretty standard return but against the Auto Components industry average of 14%, it's not as good.

Check out our latest analysis for Samvardhana Motherson International

Above you can see how the current ROCE for Samvardhana Motherson International compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

In terms of Samvardhana Motherson International's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 11% from 15% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a separate but related note, it's important to know that Samvardhana Motherson International has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Samvardhana Motherson International's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Samvardhana Motherson International is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 25% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One more thing to note, we've identified 2 warning signs with Samvardhana Motherson International and understanding them should be part of your investment process.

While Samvardhana Motherson International isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.