Why You Should Care About Sona BLW Precision Forgings' (NSE:SONACOMS) Strong Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ergo, when we looked at the ROCE trends at Sona BLW Precision Forgings (NSE:SONACOMS), we liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Sona BLW Precision Forgings is:

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

0.23 = ₹6.5b ÷ (₹35b - ₹7.1b) (Based on the trailing twelve months to December 2023).

So, Sona BLW Precision Forgings 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 Sona BLW Precision Forgings

In the above chart we have measured Sona BLW Precision Forgings' 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 Sona BLW Precision Forgings .

What Does the ROCE Trend For Sona BLW Precision Forgings Tell Us?

We'd be pretty happy with returns on capital like Sona BLW Precision Forgings. The company has consistently earned 23% for the last five years, and the capital employed within the business has risen 382% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Sona BLW Precision Forgings can keep this up, we'd be very optimistic about its future.

On a side note, Sona BLW Precision Forgings has done well to reduce current liabilities to 20% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

In Conclusion...

In summary, we're delighted to see that Sona BLW Precision Forgings has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has followed suit returning a meaningful 47% to shareholders over the last year. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Sona BLW Precision Forgings does have some risks though, and we've spotted 1 warning sign for Sona BLW Precision Forgings 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.