Here's What To Make Of Cummins' (NYSE:CMI) Decelerating Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over Cummins' (NYSE:CMI) trend of ROCE, we liked what we saw.

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. Analysts use this formula to calculate it for Cummins:

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

0.16 = US$3.3b ÷ (US$32b - US$11b) (Based on the trailing twelve months to June 2023).

So, Cummins has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 12% generated by the Machinery industry.

See our latest analysis for Cummins

Above you can see how the current ROCE for Cummins 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 Cummins here for free.

What Does the ROCE Trend For Cummins Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 16% for the last five years, and the capital employed within the business has risen 62% in that time. 16% is a pretty standard return, and it provides some comfort knowing that Cummins has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Our Take On Cummins' ROCE

The main thing to remember is that Cummins has proven its ability to continually reinvest at respectable rates of return. Therefore it's no surprise that shareholders have earned a respectable 79% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

On a final note, we've found 1 warning sign for Cummins that we think you should be aware of.

While Cummins isn't earning the highest return, check out this free list of companies that are 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.