Returns At Shriram Pistons & Rings (NSE:SHRIPISTON) Appear To Be Weighed Down

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. So, when we ran our eye over Shriram Pistons & Rings' (NSE:SHRIPISTON) trend of ROCE, we liked what we saw.

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

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 Shriram Pistons & Rings, this is the formula:

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

0.17 = ₹2.4b ÷ (₹19b - ₹4.8b) (Based on the trailing twelve months to June 2022).

Therefore, Shriram Pistons & Rings has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 12% it's much better.

See our latest analysis for Shriram Pistons & Rings

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

So How Is Shriram Pistons & Rings' ROCE Trending?

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 17% for the last five years, and the capital employed within the business has risen 40% in that time. Since 17% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

In Conclusion...

To sum it up, Shriram Pistons & Rings has simply been reinvesting capital steadily, at those decent rates of return. However, despite the favorable fundamentals, the stock has fallen 55% over the last five years, so there might be an opportunity here for astute investors. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

On a final note, we've found 1 warning sign for Shriram Pistons & Rings that we think you should be aware of.

While Shriram Pistons & Rings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.