Sundram Fasteners (NSE:SUNDRMFAST) Will Be Hoping To Turn Its Returns On Capital Around

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. In light of that, when we looked at Sundram Fasteners (NSE:SUNDRMFAST) and its ROCE trend, we weren't exactly thrilled.

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 Sundram Fasteners is:

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

0.18 = ₹7.1b ÷ (₹54b - ₹15b) (Based on the trailing twelve months to September 2024).

Therefore, Sundram Fasteners has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 14% it's much better.

View our latest analysis for Sundram Fasteners

Above you can see how the current ROCE for Sundram Fasteners compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Sundram Fasteners for free.

What Can We Tell From Sundram Fasteners' ROCE Trend?

On the surface, the trend of ROCE at Sundram Fasteners doesn't inspire confidence. Over the last five years, returns on capital have decreased to 18% from 23% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

To conclude, we've found that Sundram Fasteners is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 104% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Like most companies, Sundram Fasteners does come with some risks, and we've found 1 warning sign that you should be aware of.

While Sundram Fasteners 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.