Under The Bonnet, SML Isuzu's (NSE:SMLISUZU) Returns Look Impressive

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in SML Isuzu's (NSE:SMLISUZU) returns on capital, so let's have a look.

Understanding 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. The formula for this calculation on SML Isuzu is:

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

0.27 = ₹679m ÷ (₹9.4b - ₹6.8b) (Based on the trailing twelve months to June 2023).

Thus, SML Isuzu has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Machinery industry average of 17%.

Check out our latest analysis for SML Isuzu

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

What The Trend Of ROCE Can Tell Us

You'd find it hard not to be impressed with the ROCE trend at SML Isuzu. The figures show that over the last five years, returns on capital have grown by 345%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 57% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 73% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line

From what we've seen above, SML Isuzu has managed to increase it's returns on capital all the while reducing it's capital base. And with a respectable 97% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 1 warning sign for SML Isuzu you'll probably want to know about.

SML Isuzu is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.