Capital Allocation Trends At Talbros Automotive Components (NSE:TALBROAUTO) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 Talbros Automotive Components (NSE:TALBROAUTO) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. Analysts use this formula to calculate it for Talbros Automotive Components:

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

0.099 = ₹230m ÷ (₹4.8b - ₹2.4b) (Based on the trailing twelve months to December 2020).

Therefore, Talbros Automotive Components has an ROCE of 9.9%. In absolute terms, that's a low return but it's around the Auto Components industry average of 8.6%.

See our latest analysis for Talbros Automotive Components

Historical performance is a great place to start when researching a stock so above you can see the gauge for Talbros Automotive Components' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Talbros Automotive Components, check out these free graphs here.

How Are Returns Trending?

In terms of Talbros Automotive Components' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 17% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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 separate but related note, it's important to know that Talbros Automotive Components has a current liabilities to total assets ratio of 51%, which we'd consider pretty high. 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.

The Key Takeaway

In summary, Talbros Automotive Components is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 113% 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Talbros Automotive Components (of which 1 is concerning!) that you should know about.

While Talbros Automotive Components 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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