We're Watching These Trends At Rane Brake Lining (NSE:RBL)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at Rane Brake Lining (NSE:RBL) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Rane Brake Lining, this is the formula:

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

0.094 = ₹214m ÷ (₹3.4b - ₹1.1b) (Based on the trailing twelve months to September 2020).

Therefore, Rane Brake Lining has an ROCE of 9.4%. On its own that's a low return, but compared to the average of 6.7% generated by the Auto Components industry, it's much better.

View our latest analysis for Rane Brake Lining

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Rane Brake Lining, check out these free graphs here.

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

When we looked at the ROCE trend at Rane Brake Lining, we didn't gain much confidence. To be more specific, ROCE has fallen from 20% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

We're a bit apprehensive about Rane Brake Lining because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 161% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a final note, we've found 4 warning signs for Rane Brake Lining that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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