Tech Mahindra's (NSE:TECHM) Returns On Capital Not Reflecting Well On The Business

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Tech Mahindra (NSE:TECHM), it didn't seem to tick all of these boxes.

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What Is 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)

0.15 = ₹47b ÷ (₹428b - ₹122b) (Based on the trailing twelve months to December 2024).

So, Tech Mahindra has an ROCE of 15%. By itself that's a normal return on capital and it's in line with the industry's average returns of 15%.

See 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Tech Mahindra .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Tech Mahindra, we didn't gain much confidence. To be more specific, ROCE has fallen from 19% over the last five years. However it looks like Tech Mahindra might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Tech Mahindra's ROCE

Bringing it all together, while we're somewhat encouraged by Tech Mahindra's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 199% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing, we've spotted 1 warning sign facing Tech Mahindra that you might find interesting.

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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.