Investors Could Be Concerned With Amara Raja Batteries' (NSE:AMARAJABAT) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher 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.

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. To calculate this metric for Amara Raja Batteries, this is the formula:

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

0.13 = ₹6.3b ÷ (₹64b - ₹15b) (Based on the trailing twelve months to March 2022).

Therefore, Amara Raja Batteries has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Electrical industry average of 12%.

Check out our latest analysis for Amara Raja Batteries

In the above chart we have measured Amara Raja Batteries' 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 Amara Raja Batteries here for free.

The Trend Of ROCE

When we looked at the ROCE trend at Amara Raja Batteries, we didn't gain much confidence. To be more specific, ROCE has fallen from 23% over the last five years. 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

In summary, despite lower returns in the short term, we're encouraged to see that Amara Raja Batteries is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 42% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Amara Raja Batteries does have some risks though, and we've spotted 3 warning signs for Amara Raja Batteries that you might be interested in.

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.

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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.