TVS Srichakra (NSE:TVSSRICHAK) Will Be Hoping To Turn Its Returns On Capital Around

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think TVS Srichakra (NSE:TVSSRICHAK) 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 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 TVS Srichakra, this is the formula:

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

0.17 = ₹1.8b ÷ (₹16b - ₹5.7b) (Based on the trailing twelve months to June 2021).

Therefore, TVS Srichakra has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 14% generated by the Auto Components industry.

View our latest analysis for TVS Srichakra

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

So How Is TVS Srichakra's ROCE Trending?

When we looked at the ROCE trend at TVS Srichakra, we didn't gain much confidence. To be more specific, ROCE has fallen from 48% over the last five years. 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.

What We Can Learn From TVS Srichakra's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for TVS Srichakra. These growth trends haven't led to growth returns though, since the stock has fallen 33% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One final note, you should learn about the 2 warning signs we've spotted with TVS Srichakra (including 1 which doesn't sit too well with us) .

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

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.

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