Some Investors May Be Worried About Sundaram-Clayton's (NSE:SUNCLAYLTD) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at Sundaram-Clayton (NSE:SUNCLAYLTD) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. The formula for this calculation on Sundaram-Clayton is:

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

0.17 = ₹31b ÷ (₹352b - ₹166b) (Based on the trailing twelve months to December 2022).

So, Sundaram-Clayton has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 14% it's much better.

View 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're interested in investigating Sundaram-Clayton's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Sundaram-Clayton's ROCE Trending?

When we looked at the ROCE trend at Sundaram-Clayton, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 17% from 21% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Another thing to note, Sundaram-Clayton has a high ratio of current liabilities to total assets of 47%. 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.

Our Take On Sundaram-Clayton's ROCE

While returns have fallen for Sundaram-Clayton in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 7.0% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

If you want to know some of the risks facing Sundaram-Clayton we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.

While Sundaram-Clayton 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.