Tech Mahindra (NSE:TECHM) Is Investing Its Capital With Increasing Efficiency

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Tech Mahindra's (NSE:TECHM) returns on capital, so let's have a look.

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. To calculate this metric for Tech Mahindra, this is the formula:

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

0.20 = ₹62b ÷ (₹457b - ₹140b) (Based on the trailing twelve months to September 2022).

Thus, Tech Mahindra has an ROCE of 20%. In absolute terms that's a great return and it's even better than the IT industry average of 12%.

See our latest analysis for Tech Mahindra

In the above chart we have measured Tech Mahindra'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 Tech Mahindra here for free.

How Are Returns Trending?

Tech Mahindra is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 20%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 55%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Our Take On Tech Mahindra's ROCE

All in all, it's terrific to see that Tech Mahindra is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 108% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

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

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.