The Trends At Munjal Showa (NSE:MUNJALSHOW) That You Should Know About

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at Munjal Showa (NSE:MUNJALSHOW) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Munjal Showa, this is the formula:

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

0.016 = ₹98m ÷ (₹8.1b - ₹1.9b) (Based on the trailing twelve months to December 2020).

Therefore, Munjal Showa has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 7.8%.

View our latest analysis for Munjal Showa

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'd like to look at how Munjal Showa has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Munjal Showa Tell Us?

On the surface, the trend of ROCE at Munjal Showa doesn't inspire confidence. To be more specific, ROCE has fallen from 20% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Munjal Showa's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Munjal Showa have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 12% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know more about Munjal Showa, we've spotted 3 warning signs, and 1 of them is potentially serious.

While Munjal Showa 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. 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.
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