Returns On Capital Are Showing Encouraging Signs At Sundaram Brake Linings (NSE:SUNDRMBRAK)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Sundaram Brake Linings (NSE:SUNDRMBRAK) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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)

0.0086 = ₹9.2m ÷ (₹1.7b - ₹661m) (Based on the trailing twelve months to December 2020).

So, Sundaram Brake Linings has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 8.9%.

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

We're delighted to see that Sundaram Brake Linings is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 0.9% on its capital. In addition to that, Sundaram Brake Linings is employing 27% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 38%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

In Conclusion...

Long story short, we're delighted to see that Sundaram Brake Linings' reinvestment activities have paid off and the company is now profitable. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 38% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One more thing to note, we've identified 1 warning sign with Sundaram Brake Linings and understanding it should be part of your investment process.

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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