Rico Auto Industries (NSE:RICOAUTO) Has Some Way To Go To Become A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Although, when we looked at Rico Auto Industries (NSE:RICOAUTO), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Rico Auto Industries is:

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

0.099 = ₹1.1b ÷ (₹19b - ₹8.2b) (Based on the trailing twelve months to March 2023).

So, Rico Auto Industries has an ROCE of 9.9%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 13%.

See our latest analysis for Rico Auto Industries

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

So How Is Rico Auto Industries' ROCE Trending?

The returns on capital haven't changed much for Rico Auto Industries in recent years. Over the past five years, ROCE has remained relatively flat at around 9.9% and the business has deployed 67% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Another thing to note, Rico Auto Industries has a high ratio of current liabilities to total assets of 43%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Rico Auto Industries' ROCE

In summary, Rico Auto Industries has simply been reinvesting capital and generating the same low rate of return as before. Although the market must be expecting these trends to improve because the stock has gained 52% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Rico Auto Industries does have some risks, we noticed 3 warning signs (and 2 which are concerning) we think you should know about.

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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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.