Here's What's Concerning About Munjal Showa's (NSE:MUNJALSHOW) Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Munjal Showa (NSE:MUNJALSHOW) we aren't filled with optimism, but let's investigate further.

What Is 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. The formula for this calculation on Munjal Showa is:

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

0.0055 = ₹35m ÷ (₹8.0b - ₹1.6b) (Based on the trailing twelve months to September 2022).

So, Munjal Showa has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 13%.

Check out the opportunities and risks within the IN Auto Components industry.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Munjal Showa's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Munjal Showa, check out these free graphs here.

How Are Returns Trending?

There is reason to be cautious about Munjal Showa, given the returns are trending downwards. To be more specific, the ROCE was 12% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Munjal Showa to turn into a multi-bagger.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 51% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Munjal Showa does have some risks, we noticed 4 warning signs (and 2 which are a bit concerning) we think you should know about.

While Munjal Showa isn't earning the highest return, check out this free list of companies that are 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.