Investors Shouldn't Overlook The Favourable Returns On Capital At Tata Elxsi (NSE:TATAELXSI)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Tata Elxsi's (NSE:TATAELXSI) trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Tata Elxsi is:

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

0.44 = ₹8.3b ÷ (₹23b - ₹4.1b) (Based on the trailing twelve months to September 2022).

So, Tata Elxsi has an ROCE of 44%. In absolute terms that's a great return and it's even better than the Software industry average of 12%.

Check out the opportunities and risks within the IN Software industry.

In the above chart we have measured Tata Elxsi's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Tata Elxsi here for free.

The Trend Of ROCE

It's hard not to be impressed by Tata Elxsi's returns on capital. Over the past five years, ROCE has remained relatively flat at around 44% and the business has deployed 200% more capital into its operations. Now considering ROCE is an attractive 44%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

The Key Takeaway

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And the stock has done incredibly well with a 669% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we found 2 warning signs for Tata Elxsi (1 is a bit concerning) you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.