Returns At Cummins India (NSE:CUMMINSIND) Appear To Be Weighed Down

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. So, when we ran our eye over Cummins India's (NSE:CUMMINSIND) trend of ROCE, we liked what we saw.

Understanding 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. To calculate this metric for Cummins India, this is the formula:

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

0.17 = ₹8.7b ÷ (₹64b - ₹13b) (Based on the trailing twelve months to December 2021).

So, Cummins India has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Machinery industry average of 15%.

Check out our latest analysis for Cummins India

In the above chart we have measured Cummins India's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Cummins India.

So How Is Cummins India's ROCE Trending?

While the returns on capital are good, they haven't moved much. The company has employed 31% more capital in the last five years, and the returns on that capital have remained stable at 17%. 17% is a pretty standard return, and it provides some comfort knowing that Cummins India has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

In Conclusion...

In the end, Cummins India has proven its ability to adequately reinvest capital at good rates of return. And given the stock has only risen 17% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if Cummins India is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

If you'd like to know about the risks facing Cummins India, we've discovered 1 warning sign that you should be aware of.

While Cummins India 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.