Tech Mahindra (NSE:TECHM) Is Very Good At Capital Allocation

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at Tech Mahindra's (NSE:TECHM) look very promising so lets take a look.

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 Tech Mahindra, this is the formula:

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

0.20 = ₹65b ÷ (₹449b - ₹125b) (Based on the trailing twelve months to March 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 11%.

View our latest analysis for Tech Mahindra

Above you can see how the current ROCE for Tech Mahindra compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Tech Mahindra here for free.

How Are Returns Trending?

The trends we've noticed at Tech Mahindra are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 20%. The amount of capital employed has increased too, by 64%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

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. And a remarkable 243% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Tech Mahindra can keep these trends up, it could have a bright future ahead.

If you want to continue researching Tech Mahindra, you might be interested to know about the 2 warning signs that our analysis has discovered.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.