Investors Shouldn't Overlook Shriram Pistons & Rings' (NSE:SHRIPISTON) Impressive Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. And in light of that, the trends we're seeing at Shriram Pistons & Rings' (NSE:SHRIPISTON) look very promising so lets take a look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Shriram Pistons & Rings is:

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

0.23 = ₹5.5b ÷ (₹31b - ₹8.0b) (Based on the trailing twelve months to June 2024).

Therefore, Shriram Pistons & Rings has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Auto Components industry average of 15%.

See our latest analysis for Shriram Pistons & Rings

In the above chart we have measured Shriram Pistons & Rings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shriram Pistons & Rings .

What Can We Tell From Shriram Pistons & Rings' ROCE Trend?

We like the trends that we're seeing from Shriram Pistons & Rings. The data shows that returns on capital have increased substantially over the last five years to 23%. The amount of capital employed has increased too, by 100%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From Shriram Pistons & Rings' ROCE

In summary, it's great to see that Shriram Pistons & Rings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 531% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Shriram Pistons & Rings does have some risks though, and we've spotted 2 warning signs for Shriram Pistons & Rings that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.