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- Auto Components
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- NSEI:TVSHLTD
Slowing Rates Of Return At Sundaram-Clayton (NSE:SUNCLAYLTD) Leave Little Room For Excitement
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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Sundaram-Clayton's (NSE:SUNCLAYLTD) ROCE trend, we were pretty happy with what we saw.
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. To calculate this metric for Sundaram-Clayton, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = ₹22b ÷ (₹269b - ₹131b) (Based on the trailing twelve months to September 2021).
Thus, Sundaram-Clayton has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 13% it's much better.
Check out our latest analysis for Sundaram-Clayton
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 Sundaram-Clayton, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
While the current returns on capital are decent, they haven't changed much. The company has employed 303% more capital in the last five years, and the returns on that capital have remained stable at 16%. Since 16% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
On a separate but related note, it's important to know that Sundaram-Clayton has a current liabilities to total assets ratio of 49%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Key Takeaway
The main thing to remember is that Sundaram-Clayton has proven its ability to continually reinvest at respectable rates of return. In light of this, the stock has only gained 19% over the last five years for shareholders who have owned the stock in this period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.
Sundaram-Clayton does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those don't sit too well with us...
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
About NSEI:TVSHLTD
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