Returns On Capital Signal Tricky Times Ahead For ZF Commercial Vehicle Control Systems India (NSE:ZFCVINDIA)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think ZF Commercial Vehicle Control Systems India (NSE:ZFCVINDIA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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 ZF Commercial Vehicle Control Systems India is:

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

0.077 = ₹1.6b ÷ (₹24b - ₹3.8b) (Based on the trailing twelve months to December 2021).

Thus, ZF Commercial Vehicle Control Systems India has an ROCE of 7.7%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 13%.

See our latest analysis for ZF Commercial Vehicle Control Systems India

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

What Can We Tell From ZF Commercial Vehicle Control Systems India's ROCE Trend?

When we looked at the ROCE trend at ZF Commercial Vehicle Control Systems India, we didn't gain much confidence. To be more specific, ROCE has fallen from 22% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that ZF Commercial Vehicle Control Systems India is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 33% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Like most companies, ZF Commercial Vehicle Control Systems India does come with some risks, and we've found 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.