The Returns On Capital At 3M India (NSE:3MINDIA) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, while the ROCE is currently high for 3M India (NSE:3MINDIA), we aren't jumping out of our chairs because returns are decreasing.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for 3M India:

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

0.21 = ₹5.2b ÷ (₹33b - ₹8.5b) (Based on the trailing twelve months to December 2022).

Thus, 3M India has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Industrials industry average of 10%.

View 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, you can check out the forecasts from the analysts covering 3M India here for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at 3M India doesn't inspire confidence. To be more specific, while the ROCE is still high, it's fallen from 31% where it was 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From 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. In light of this, the stock has only gained 16% 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.

3M India could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.