Sundram Fasteners (NSE:SUNDRMFAST) Will Want To Turn Around Its Return Trends

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Sundram Fasteners (NSE:SUNDRMFAST) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Sundram Fasteners, this is the formula:

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

0.17 = ₹4.8b ÷ (₹39b - ₹11b) (Based on the trailing twelve months to March 2021).

So, Sundram Fasteners has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 11% it's much better.

See our latest analysis for Sundram Fasteners

In the above chart we have measured Sundram Fasteners' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Sundram Fasteners here for free.

How Are Returns Trending?

In terms of Sundram Fasteners' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 25%, but since then they've fallen to 17%. 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.

On a side note, Sundram Fasteners has done well to pay down its current liabilities to 29% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

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 268% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to continue researching Sundram Fasteners, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Sundram Fasteners isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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