Here's What's Concerning About PPAP Automotive's (NSE:PPAP) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after briefly looking over the numbers, we don't think PPAP Automotive (NSE:PPAP) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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 PPAP Automotive:

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

0.014 = ₹55m ÷ (₹5.5b - ₹1.6b) (Based on the trailing twelve months to June 2023).

Thus, PPAP Automotive 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 PPAP Automotive

Above you can see how the current ROCE for PPAP Automotive compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For PPAP Automotive Tell Us?

In terms of PPAP Automotive's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 19% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On PPAP Automotive's ROCE

Bringing it all together, while we're somewhat encouraged by PPAP Automotive's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 27% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think PPAP Automotive has the makings of a multi-bagger.

PPAP Automotive does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those can't be ignored...

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.