We Like These Underlying Return On Capital Trends At Kirloskar Pneumatic (NSE:KIRLPNU)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 looked at Kirloskar Pneumatic (NSE:KIRLPNU) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Kirloskar Pneumatic:

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

0.18 = ₹1.7b ÷ (₹14b - ₹4.3b) (Based on the trailing twelve months to March 2024).

Thus, Kirloskar Pneumatic has an ROCE of 18%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Machinery industry average of 17%.

View our latest analysis for Kirloskar Pneumatic

In the above chart we have measured Kirloskar Pneumatic's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Kirloskar Pneumatic .

What Does the ROCE Trend For Kirloskar Pneumatic Tell Us?

Kirloskar Pneumatic is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 18%. The amount of capital employed has increased too, by 90%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Kirloskar Pneumatic has. And with a respectable 90% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One final note, you should learn about the 2 warning signs we've spotted with Kirloskar Pneumatic (including 1 which is a bit unpleasant) .

While Kirloskar Pneumatic 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.