Omax Autos' (NSE:OMAXAUTO) Returns On Capital Not Reflecting Well On The Business

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.014 = ₹55m ÷ (₹4.9b - ₹1.0b) (Based on the trailing twelve months to March 2023).

Therefore, Omax Autos has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 14%.

See 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 want to delve into the historical earnings, revenue and cash flow of Omax Autos, check out these free graphs here.

SWOT Analysis for Omax Autos

So How Is Omax Autos' ROCE Trending?

In terms of Omax Autos' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 9.4%, but since then they've fallen to 1.4%. 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 related note, Omax Autos has decreased its current liabilities to 21% of total assets. That could partly explain why the ROCE has dropped. 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. And there could be an opportunity here if other metrics look good too, because the stock has declined 68% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Omax Autos does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.

While Omax Autos isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.