Investors Will Want Sundaram Brake Linings' (NSE:SUNDRMBRAK) Growth In ROCE To Persist

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Sundaram Brake Linings (NSE:SUNDRMBRAK) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Sundaram Brake Linings is:

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

0.083 = ₹89m ÷ (₹1.9b - ₹849m) (Based on the trailing twelve months to September 2023).

Therefore, Sundaram Brake Linings has an ROCE of 8.3%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 14%.

See our latest analysis for Sundaram Brake Linings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sundaram Brake Linings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Sundaram Brake Linings, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Sundaram Brake Linings' ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 131% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a side note, Sundaram Brake Linings' current liabilities are still rather high at 44% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

To bring it all together, Sundaram Brake Linings has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 135% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Sundaram Brake Linings can keep these trends up, it could have a bright future ahead.

Like most companies, Sundaram Brake Linings does come with some risks, and we've found 1 warning sign that you should be aware of.

While Sundaram Brake Linings 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.