Returns At DCM Shriram (NSE:DCMSHRIRAM) Appear To Be Weighed Down

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at DCM Shriram's (NSE:DCMSHRIRAM) ROCE trend, we were pretty happy with 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 DCM Shriram:

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

0.18 = ₹11b ÷ (₹81b - ₹19b) (Based on the trailing twelve months to September 2021).

So, DCM Shriram has an ROCE of 18%. That's a pretty standard return and it's in line with the industry average of 18%.

See our latest analysis for DCM Shriram

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

How Are Returns Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 18% for the last five years, and the capital employed within the business has risen 115% in that time. Since 18% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a side note, DCM Shriram has done well to reduce current liabilities to 24% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line

To sum it up, DCM Shriram has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 455% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One more thing to note, we've identified 2 warning signs with DCM Shriram and understanding them should be part of your investment process.

While DCM Shriram 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.

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.

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