3M India (NSE:3MINDIA) Will Want To Turn Around Its Return Trends

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at 3M India (NSE:3MINDIA) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for 3M India, this is the formula:

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

0.14 = ₹2.8b ÷ (₹28b - ₹7.6b) (Based on the trailing twelve months to December 2021).

Thus, 3M India has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.7% generated by the Industrials industry.

Check out our latest analysis for 3M India

In the above chart we have measured 3M India's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for 3M India.

How Are Returns Trending?

When we looked at the ROCE trend at 3M India, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 14% from 26% 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.

Our Take On 3M India's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that 3M India is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 88% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you want to continue researching 3M India, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.