Capital Allocation Trends At Rane Brake Lining (NSE:RBL) Aren't Ideal

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. In light of that, when we looked at Rane Brake Lining (NSE:RBL) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Rane Brake Lining:

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

0.12 = ₹271m ÷ (₹3.5b - ₹1.2b) (Based on the trailing twelve months to December 2021).

Thus, Rane Brake Lining has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Auto Components industry average of 13%.

View our latest analysis for Rane Brake Lining

Historical performance is a great place to start when researching a stock so above you can see the gauge for Rane Brake Lining's ROCE against it's prior returns. If you're interested in investigating Rane Brake Lining's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Rane Brake Lining's ROCE Trend?

On the surface, the trend of ROCE at Rane Brake Lining doesn't inspire confidence. To be more specific, ROCE has fallen from 29% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Rane Brake Lining's ROCE

While returns have fallen for Rane Brake Lining in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 38% 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.

Rane Brake Lining does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those is concerning...

While Rane Brake Lining 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.