Returns On Capital Signal Tricky Times Ahead For Ashok Leyland (NSE:ASHOKLEY)

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Ashok Leyland (NSE:ASHOKLEY) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Ashok Leyland is:

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

0.07 = ₹18b ÷ (₹421b - ₹162b) (Based on the trailing twelve months to June 2021).

So, Ashok Leyland has an ROCE of 7.0%. In absolute terms, that's a low return and it also 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.

How Are Returns Trending?

In terms of Ashok Leyland's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.0% from 18% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

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. And the stock has followed suit returning a meaningful 71% 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.

One final note, you should learn about the 3 warning signs we've spotted with Ashok Leyland (including 2 which are potentially serious) .

While Ashok Leyland isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

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