Returns On Capital At Shanthi Gears (NSE:SHANTIGEAR) Have Stalled

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Shanthi Gears (NSE:SHANTIGEAR), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Shanthi Gears, this is the formula:

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

0.03 = ₹71m ÷ (₹2.9b - ₹533m) (Based on the trailing twelve months to December 2020).

So, Shanthi Gears has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Machinery industry average of 11%.

View our latest analysis for Shanthi Gears

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Shanthi Gears has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Shanthi Gears Tell Us?

There hasn't been much to report for Shanthi Gears' returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Shanthi Gears doesn't end up being a multi-bagger in a few years time.

The Key Takeaway

In summary, Shanthi Gears isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 55% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to continue researching Shanthi Gears, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Shanthi Gears 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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