Rane (Madras) (NSE:RML) Will Want To Turn Around Its Return Trends

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Rane (Madras) (NSE:RML) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 Rane (Madras):

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

0.04 = ₹208m ÷ (₹13b - ₹8.1b) (Based on the trailing twelve months to September 2022).

So, Rane (Madras) has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 13%.

Check out our latest analysis for Rane (Madras)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Rane (Madras)'s ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Rane (Madras), check out these free graphs here.

What Can We Tell From Rane (Madras)'s ROCE Trend?

When we looked at the ROCE trend at Rane (Madras), we didn't gain much confidence. To be more specific, ROCE has fallen from 14% 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.

On a separate but related note, it's important to know that Rane (Madras) has a current liabilities to total assets ratio of 61%, which we'd consider pretty high. 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 Rane (Madras)'s ROCE

While returns have fallen for Rane (Madras) 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 49% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Rane (Madras) does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are significant...

While Rane (Madras) 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.