PPAP Automotive (NSE:PPAP) Will Want To Turn Around Its Return Trends

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Although, when we looked at PPAP Automotive (NSE:PPAP), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on PPAP Automotive is:

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

0.042 = ₹168m ÷ (₹5.4b - ₹1.4b) (Based on the trailing twelve months to December 2022).

So, PPAP Automotive has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 14%.

See our latest analysis for PPAP Automotive

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

What Can We Tell From PPAP Automotive's ROCE Trend?

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. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On PPAP Automotive's ROCE

While returns have fallen for PPAP Automotive in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 70% over 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.

On a final note, we found 4 warning signs for PPAP Automotive (3 don't sit too well with us) you should be aware of.

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.