Returns On Capital At Cummins India (NSE:CUMMINSIND) Have Hit The Brakes

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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 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 Cummins India, this is the formula:

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

0.17 = ₹8.8b ÷ (₹64b - ₹13b) (Based on the trailing twelve months to December 2021).

Therefore, Cummins India has an ROCE of 17%. That's a relatively normal return on capital, and it's around the 14% generated by the Machinery industry.

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.

What Does the ROCE Trend For Cummins India Tell Us?

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.

The Key Takeaway

In the end, Cummins India has proven its ability to adequately reinvest capital at good rates of return. In light of this, the stock has only gained 21% over the last five years for shareholders who have owned the stock in this period. So to determine if Cummins India is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

One more thing to note, we've identified 1 warning sign with Cummins India and understanding it should be part of your investment process.

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

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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.