Sundaram Brake Linings (NSE:SUNDRMBRAK) May Have Issues Allocating Its Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Sundaram Brake Linings (NSE:SUNDRMBRAK), the trends above didn't look too great.

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. Analysts use this formula to calculate it for Sundaram Brake Linings:

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

0.0021 = ₹2.1m ÷ (₹2.0b - ₹1.0b) (Based on the trailing twelve months to September 2021).

So, Sundaram Brake Linings has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 13%.

View 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 Can We Tell From Sundaram Brake Linings' ROCE Trend?

There is reason to be cautious about Sundaram Brake Linings, given the returns are trending downwards. To be more specific, the ROCE was 6.8% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Sundaram Brake Linings becoming one if things continue as they have.

On a separate but related note, it's important to know that Sundaram Brake Linings has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Sundaram Brake Linings' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Despite the concerning underlying trends, the stock has actually gained 1.3% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Sundaram Brake Linings does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are concerning...

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.