Can Sundaram Finance Holdings (NSE:SUNDARMHLD) Continue To Grow Its Returns On Capital?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. With that in mind, we've noticed some promising trends at Sundaram Finance Holdings (NSE:SUNDARMHLD) so let's look a bit deeper.

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. Analysts use this formula to calculate it for Sundaram Finance Holdings:

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

0.015 = ₹282m ÷ (₹18b - ₹45m) (Based on the trailing twelve months to September 2020).

Therefore, Sundaram Finance Holdings has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 7.3%.

Check out our latest analysis for Sundaram Finance Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sundaram Finance Holdings' ROCE against it's prior returns. If you'd like to look at how Sundaram Finance Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Sundaram Finance Holdings' ROCE Trend?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last four years to 1.5%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 7,335%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line On Sundaram Finance Holdings' ROCE

All in all, it's terrific to see that Sundaram Finance Holdings is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 13% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we've found 3 warning signs for Sundaram Finance Holdings that we think you should be aware of.

While Sundaram Finance Holdings 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. 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.
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