Investors Will Want Sundaram Finance Holdings' (NSE:SUNDARMHLD) Growth In ROCE To Persist

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Sundaram Finance Holdings (NSE:SUNDARMHLD) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Sundaram Finance Holdings, this is the formula:

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

0.013 = ₹262m ÷ (₹20b - ₹83m) (Based on the trailing twelve months to December 2020).

So, Sundaram Finance Holdings has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 8.9%.

View our latest analysis for Sundaram Finance Holdings

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 Finance Holdings, check out these free graphs here.

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

The fact that Sundaram Finance Holdings is now generating some pre-tax profits from its prior investments is very encouraging. About four years ago the company was generating losses but things have turned around because it's now earning 1.3% on its capital. Not only that, but the company is utilizing 6,526% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Key Takeaway

To the delight of most shareholders, Sundaram Finance Holdings has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 45% in the last three years. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to continue researching Sundaram Finance Holdings, you might be interested to know about the 2 warning signs that our analysis has discovered.

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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