Stock Analysis

Sundaram-Clayton (NSE:SUNCLAYLTD) Is Reinvesting At Lower Rates Of Return

NSEI:TVSHLTD
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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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 Sundaram-Clayton (NSE:SUNCLAYLTD) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Sundaram-Clayton:

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

0.13 = ₹22b ÷ (₹306b - ₹146b) (Based on the trailing twelve months to March 2022).

So, Sundaram-Clayton has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 11% it's much better.

View our latest analysis for Sundaram-Clayton

roce
NSEI:SUNCLAYLTD Return on Capital Employed June 28th 2022

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sundaram-Clayton's ROCE against it's prior returns. 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

When we looked at the ROCE trend at Sundaram-Clayton, we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 13%. 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.

On a side note, Sundaram-Clayton's current liabilities are still rather high at 48% of total assets. 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

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Sundaram-Clayton. These trends are starting to be recognized by investors since the stock has delivered a 0.1% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

On a final note, we found 2 warning signs for Sundaram-Clayton (1 doesn't sit too well with us) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.