Investors Could Be Concerned With WABCO India's (NSE:WABCOINDIA) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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 WABCO India (NSE:WABCOINDIA) 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on WABCO India is:

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

0.044 = ₹839m ÷ (₹22b - ₹3.1b) (Based on the trailing twelve months to December 2020).

So, WABCO India has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 8.7%.

Check out our latest analysis for WABCO India

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

So How Is WABCO India's ROCE Trending?

In terms of WABCO India's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.4% from 23% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for WABCO India have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 7.9% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

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

While WABCO India 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. 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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