Will Cummins India (NSE:CUMMINSIND) Multiply In Value Going Forward?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Cummins India (NSE:CUMMINSIND), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

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 Cummins India, this is the formula:

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

0.12 = ₹5.4b ÷ (₹62b - ₹16b) (Based on the trailing twelve months to December 2020).

Therefore, Cummins India has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% generated by the Machinery industry.

See our latest analysis for Cummins India

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

The Trend Of ROCE

In terms of Cummins India's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 12% from 20% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Cummins India's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Cummins India have fallen, meanwhile the business is employing more capital than it was five years ago. Investors must expect better things on the horizon though because the stock has risen 16% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Cummins India does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

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. 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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