Stock Analysis

The Returns On Capital At Sundram Fasteners (NSE:SUNDRMFAST) Don't Inspire Confidence

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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Sundram Fasteners (NSE:SUNDRMFAST), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Sundram Fasteners is:

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

0.21 = ₹6.3b ÷ (₹43b - ₹13b) (Based on the trailing twelve months to June 2022).

Thus, Sundram Fasteners has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Auto Components industry average of 12%.

See our latest analysis for Sundram Fasteners

NSEI:SUNDRMFAST Return on Capital Employed September 28th 2022

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

In terms of Sundram Fasteners' historical ROCE movements, the trend isn't fantastic. To be more specific, while the ROCE is still high, it's fallen from 35% where it was five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Sundram Fasteners has decreased 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.

Our Take On Sundram Fasteners' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Sundram Fasteners is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 106% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

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

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

Valuation is complex, but we're helping make it simple.

Find out whether Sundram Fasteners is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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Sundram Fasteners

Sundram Fasteners Limited manufactures and sells precision components for the automotive, infrastructure, windmill, and aviation sectors in India, China, Germany, the United States, the United Kingdom, Italy, France, and Brazil.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Future Growth5
Past Performance2
Financial Health6

Read more about these checks in the individual report sections or in our analysis model.

Flawless balance sheet with high growth potential and pays a dividend.