ZF Commercial Vehicle Control Systems India (NSE:ZFCVINDIA) Will Want To Turn Around Its Return Trends

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at ZF Commercial Vehicle Control Systems India (NSE:ZFCVINDIA), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.12 = ₹2.6b ÷ (₹28b - ₹4.8b) (Based on the trailing twelve months to September 2022).

Therefore, ZF Commercial Vehicle Control Systems India has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 14% generated by the Auto Components industry.

See our latest analysis for ZF Commercial Vehicle Control Systems India

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating ZF Commercial Vehicle Control Systems India's past further, check out this free graph of past earnings, revenue and cash flow.

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. Over the last five years, returns on capital have decreased to 12% from 20% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On ZF Commercial Vehicle Control Systems India'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 ZF Commercial Vehicle Control Systems India. Furthermore the stock has climbed 42% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we've found 1 warning sign for ZF Commercial Vehicle Control Systems India that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.