If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at MRF (NSE:MRF), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for MRF, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.052 = ₹8.4b ÷ (₹231b - ₹70b) (Based on the trailing twelve months to March 2022).
So, MRF has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 13%.
See our latest analysis for MRF
In the above chart we have measured MRF's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering MRF here for free.
What Can We Tell From MRF's ROCE Trend?
In terms of MRF's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 20% over the last five years. 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. If these investments prove successful, this can bode very well for long term stock performance.
Our Take On MRF's ROCE
While returns have fallen for MRF in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 10% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.
If you want to know some of the risks facing MRF we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.
While MRF may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
About NSEI:MRF
MRF
Engages in the manufacture, sale, and trading of rubber products in India and internationally.
Flawless balance sheet with proven track record.
