Why You Should Care About Tata Elxsi's (NSE:TATAELXSI) Strong Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. 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)

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 Tata Elxsi, this is the formula:

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

0.39 = ₹9.0b ÷ (₹28b - ₹4.8b) (Based on the trailing twelve months to June 2023).

So, Tata Elxsi has an ROCE of 39%. In absolute terms that's a great return and it's even better than the Software industry average of 12%.

See our latest analysis for Tata Elxsi

Above you can see how the current ROCE for Tata Elxsi compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Tata Elxsi's ROCE Trend?

In terms of Tata Elxsi's history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 39% and the business has deployed 202% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

The Bottom Line

In summary, we're delighted to see that Tata Elxsi has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable 488% return to those who've held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

While Tata Elxsi looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether TATAELXSI is currently trading for a fair price.

Tata Elxsi 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.

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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.