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

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. 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.

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. Analysts use this formula to calculate it for ZF Commercial Vehicle Control Systems India:

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

0.17 = ₹4.6b ÷ (₹32b - ₹5.5b) (Based on the trailing twelve months to December 2023).

Thus, ZF Commercial Vehicle Control Systems India has an ROCE of 17%. That's a relatively normal return on capital, and it's around the 15% generated by the Auto Components industry.

View our latest analysis for ZF Commercial Vehicle Control Systems India

Above you can see how the current ROCE for ZF Commercial Vehicle Control Systems India compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering ZF Commercial Vehicle Control Systems India for free.

What Does the ROCE Trend For ZF Commercial Vehicle Control Systems India Tell Us?

In terms of ZF Commercial Vehicle Control Systems India's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 22%, but since then they've fallen to 17%. 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.

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. And long term investors must be optimistic going forward because the stock has returned a huge 113% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

ZF Commercial Vehicle Control Systems India could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for ZFCVINDIA on our platform quite valuable.

While ZF Commercial Vehicle Control Systems India isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.