Sundaram Brake Linings' (NSE:SUNDRMBRAK) Returns On Capital Are Heading Higher

There are a few key trends to look for if we want to identify the next multi-bagger. 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. With that in mind, we've noticed some promising trends at Sundaram Brake Linings (NSE:SUNDRMBRAK) so let's look a bit deeper.

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What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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)

0.039 = ₹44m ÷ (₹2.2b - ₹1.1b) (Based on the trailing twelve months to December 2024).

Therefore, Sundaram Brake Linings has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 15%.

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 The Trend Of ROCE Can Tell Us

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. 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 51% 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 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.

What We Can Learn From Sundaram Brake Linings' ROCE

In summary, we're delighted to see that Sundaram Brake Linings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 325% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing: We've identified 3 warning signs with Sundaram Brake Linings (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

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.