There Are Reasons To Feel Uneasy About Shriram Pistons & Rings' (NSE:SHRIPISTON) Returns On Capital

What trends should we look for it we want to identify stocks that can 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Shriram Pistons & Rings (NSE:SHRIPISTON) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Shriram Pistons & Rings:

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

0.089 = ₹1.1b ÷ (₹17b - ₹4.4b) (Based on the trailing twelve months to March 2021).

So, Shriram Pistons & Rings has an ROCE of 8.9%. Even though it's in line with the industry average of 9.5%, it's still a low return by itself.

Check out our latest analysis for Shriram Pistons & Rings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Shriram Pistons & Rings, check out these free graphs here.

What Does the ROCE Trend For Shriram Pistons & Rings Tell Us?

On the surface, the trend of ROCE at Shriram Pistons & Rings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.9% from 15% five years ago. However it looks like Shriram Pistons & Rings might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Shriram Pistons & Rings' ROCE

Bringing it all together, while we're somewhat encouraged by Shriram Pistons & Rings' reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 38% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing: We've identified 2 warning signs with Shriram Pistons & Rings (at least 1 which can't be ignored) , and understanding them would certainly be useful.

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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