Ashok Leyland (NSE:ASHOKLEY) Will Be Hoping To Turn Its Returns On Capital Around

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Ashok Leyland (NSE:ASHOKLEY) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Ashok Leyland, this is the formula:

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

0.093 = ₹23b ÷ (₹436b - ₹186b) (Based on the trailing twelve months to June 2022).

So, Ashok Leyland has an ROCE of 9.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 14%.

Check out our latest analysis for Ashok Leyland

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

What Can We Tell From Ashok Leyland's ROCE Trend?

On the surface, the trend of ROCE at Ashok Leyland doesn't inspire confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 9.3%. 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.

On a separate but related note, it's important to know that Ashok Leyland has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Ashok Leyland's ROCE

While returns have fallen for Ashok Leyland in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 38% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Ashok Leyland does have some risks, we noticed 3 warning signs (and 2 which make us uncomfortable) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.