Sundaram Brake Linings' (NSE:SUNDRMBRAK) Returns On Capital Not Reflecting Well On The Business

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Sundaram Brake Linings (NSE:SUNDRMBRAK), so let's see why.

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)

0.021 = ₹21m ÷ (₹2.1b - ₹1.1b) (Based on the trailing twelve months to June 2023).

Thus, Sundaram Brake Linings has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 14%.

Check out our latest analysis for Sundaram Brake Linings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Sundaram Brake Linings, check out these free graphs here.

So How Is Sundaram Brake Linings' ROCE Trending?

In terms of Sundaram Brake Linings' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 3.7%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Sundaram Brake Linings to turn into a multi-bagger.

On a side note, Sundaram Brake Linings' current liabilities are still rather high at 51% of total assets. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In summary, it's unfortunate that Sundaram Brake Linings is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 39% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know more about Sundaram Brake Linings, we've spotted 3 warning signs, and 2 of them make us uncomfortable.

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.