Motherson Sumi Wiring India (NSE:MSUMI) Is Reinvesting At Lower Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So when we looked at Motherson Sumi Wiring India (NSE:MSUMI), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Motherson Sumi Wiring India is:

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

0.44 = ₹8.2b ÷ (₹34b - ₹15b) (Based on the trailing twelve months to December 2024).

So, Motherson Sumi Wiring India has an ROCE of 44%. In absolute terms that's a great return and it's even better than the Auto Components industry average of 15%.

See our latest analysis for Motherson Sumi Wiring India

In the above chart we have measured Motherson Sumi Wiring India's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Motherson Sumi Wiring India .

What Does the ROCE Trend For Motherson Sumi Wiring India Tell Us?

In terms of Motherson Sumi Wiring India's historical ROCE movements, the trend isn't fantastic. To be more specific, while the ROCE is still high, it's fallen from 59% where it was three years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Motherson Sumi Wiring India's current liabilities are still rather high at 45% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Motherson Sumi Wiring India. And there could be an opportunity here if other metrics look good too, because the stock has declined 33% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Motherson Sumi Wiring India could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for MSUMI on our platform quite valuable.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.