Some Investors May Be Worried About PPAP Automotive's (NSE:PPAP) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at PPAP Automotive (NSE:PPAP) 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.033 = ₹128m ÷ (₹5.5b - ₹1.6b) (Based on the trailing twelve months to March 2023).

Thus, PPAP Automotive has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 13%.

Check out 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 The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at PPAP Automotive, we didn't gain much confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 3.3%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From PPAP Automotive's 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 PPAP Automotive. However, despite the promising trends, the stock has fallen 62% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One more thing: We've identified 5 warning signs with PPAP Automotive (at least 4 which are potentially serious) , and understanding these would certainly be useful.

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

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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.