Investors Will Want Sundaram Brake Linings' (NSE:SUNDRMBRAK) 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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So when we looked at Sundaram Brake Linings (NSE:SUNDRMBRAK) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Sundaram Brake Linings, this is the formula:

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

0.068 = ₹76m ÷ (₹2.2b - ₹1.1b) (Based on the trailing twelve months to September 2024).

Therefore, Sundaram Brake Linings has an ROCE of 6.8%. 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're interested in investigating Sundaram Brake Linings' past further, check out this free graph covering Sundaram Brake Linings' past earnings, revenue and cash flow.

What Does the ROCE Trend For Sundaram Brake Linings Tell Us?

Sundaram Brake Linings has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 132% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

On a side note, Sundaram Brake Linings' current liabilities are still rather high at 49% 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 Key Takeaway

To sum it up, Sundaram Brake Linings is collecting higher returns from the same amount of capital, and that's impressive. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

Sundaram Brake Linings does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit concerning...

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.