CNH Industrial (NYSE:CNHI) Is Experiencing Growth In Returns On Capital

By
Simply Wall St
Published
October 15, 2021
NYSE:CNHI
Source: Shutterstock

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. With that in mind, we've noticed some promising trends at CNH Industrial (NYSE:CNHI) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on CNH Industrial is:

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

0.063 = US$2.4b ÷ (US$49b - US$11b) (Based on the trailing twelve months to June 2021).

Therefore, CNH Industrial has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.5%.

Check out our latest analysis for CNH Industrial

roce
NYSE:CNHI Return on Capital Employed October 16th 2021

Above you can see how the current ROCE for CNH Industrial 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.

The Trend Of ROCE

CNH Industrial is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 105% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line On CNH Industrial's ROCE

In summary, we're delighted to see that CNH Industrial has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 132% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we've found 3 warning signs for CNH Industrial that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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