Amara Raja Batteries (NSE:AMARAJABAT) Might Be Having Difficulty Using Its Capital Effectively

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Amara Raja Batteries (NSE:AMARAJABAT), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Amara Raja Batteries is:

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

0.16 = ₹7.4b ÷ (₹61b - ₹15b) (Based on the trailing twelve months to December 2021).

Thus, Amara Raja Batteries has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 13% generated by the Electrical industry.

Check out our latest analysis for Amara Raja Batteries

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

The Trend Of ROCE

In terms of Amara Raja Batteries' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 26% 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. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Amara Raja Batteries' 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 Amara Raja Batteries. However, despite the promising trends, the stock has fallen 28% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

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

While Amara Raja Batteries may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.