Here's What's Concerning About Escorts Kubota's (NSE:ESCORTS) Returns On Capital

There are a few key trends to look for if we want to identify the next 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Escorts Kubota (NSE:ESCORTS), it didn't seem to tick all of these boxes.

What Is 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 Escorts Kubota, this is the formula:

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

0.092 = ₹7.7b ÷ (₹101b - ₹17b) (Based on the trailing twelve months to June 2023).

Thus, Escorts Kubota has an ROCE of 9.2%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 17%.

Check out our latest analysis for Escorts Kubota

Above you can see how the current ROCE for Escorts Kubota compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Escorts Kubota Tell Us?

On the surface, the trend of ROCE at Escorts Kubota doesn't inspire confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 9.2%. 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.

On a side note, Escorts Kubota has done well to pay down its current liabilities to 17% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Escorts Kubota's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Escorts Kubota. And the stock has done incredibly well with a 406% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One more thing, we've spotted 1 warning sign facing Escorts Kubota that you might find interesting.

While Escorts Kubota 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.