Omax Autos (NSE:OMAXAUTO) Might Be Having Difficulty Using Its Capital Effectively

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Omax Autos (NSE:OMAXAUTO), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Omax Autos:

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

0.054 = ₹198m ÷ (₹4.6b - ₹949m) (Based on the trailing twelve months to December 2023).

So, Omax Autos has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 15%.

Check out our latest analysis for Omax Autos

Historical performance is a great place to start when researching a stock so above you can see the gauge for Omax Autos' ROCE against it's prior returns. If you'd like to look at how Omax Autos has performed in the past in other metrics, you can view this free graph of Omax Autos' past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Omax Autos doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.4% from 14% five 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Omax Autos has done well to pay down its current liabilities to 21% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Omax Autos' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Omax Autos. Furthermore the stock has climbed 78% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing: We've identified 4 warning signs with Omax Autos (at least 1 which can't be ignored) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.