Shivam Autotech (NSE:SHIVAMAUTO) Is Looking To Continue Growing Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Shivam Autotech's (NSE:SHIVAMAUTO) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

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 Shivam Autotech:

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

0.095 = ₹304m ÷ (₹6.4b - ₹3.2b) (Based on the trailing twelve months to March 2022).

So, Shivam Autotech has an ROCE of 9.5%. In absolute terms, that's a low return but it's around the Auto Components industry average of 11%.

View our latest analysis for Shivam Autotech

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

The Trend Of ROCE

Shivam Autotech has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 153%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 22% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 50% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

The Bottom Line

In a nutshell, we're pleased to see that Shivam Autotech has been able to generate higher returns from less capital. And since the stock has fallen 48% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Shivam Autotech (of which 1 is a bit concerning!) that you should know about.

While Shivam Autotech 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.