Sona BLW Precision Forgings (NSE:SONACOMS) Is Reinvesting At Lower Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Sona BLW Precision Forgings (NSE:SONACOMS) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Sona BLW Precision Forgings, this is the formula:

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

0.13 = ₹7.3b ÷ (₹63b - ₹5.7b) (Based on the trailing twelve months to December 2024).

So, Sona BLW Precision Forgings has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Auto Components industry average of 15%.

Check out our latest analysis for Sona BLW Precision Forgings

Above you can see how the current ROCE for Sona BLW Precision Forgings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Sona BLW Precision Forgings .

The Trend Of ROCE

Unfortunately, the trend isn't great with ROCE falling from 20% five years ago, while capital employed has grown 535%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Sona BLW Precision Forgings probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, Sona BLW Precision Forgings has done well to pay down its current liabilities to 9.1% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Sona BLW Precision Forgings' ROCE

While returns have fallen for Sona BLW Precision Forgings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 21% over the last three years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Sona BLW Precision Forgings could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for SONACOMS on our platform quite valuable.

While Sona BLW Precision Forgings 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.