If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Shriram Pistons & Rings (NSE:SHRIPISTON), it didn’t seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Shriram Pistons & Rings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.051 = ₹592m ÷ (₹15b – ₹3.7b) (Based on the trailing twelve months to December 2020).
So, Shriram Pistons & Rings has an ROCE of 5.1%. Ultimately, that’s a low return and it under-performs the Auto Components industry average of 8.6%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Shriram Pistons & Rings, check out these free graphs here.
How Are Returns Trending?
When we looked at the ROCE trend at Shriram Pistons & Rings, we didn’t gain much confidence. Over the last five years, returns on capital have decreased to 5.1% from 14% five years ago. And considering revenue has dropped while employing more capital, we’d be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven’t increased.
The Key Takeaway
In summary, we’re somewhat concerned by Shriram Pistons & Rings’ diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 46% over the last three years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
If you want to know some of the risks facing Shriram Pistons & Rings we’ve found 3 warning signs (1 shouldn’t be ignored!) that you should be aware of before investing here.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
If you’re looking to trade Shriram Pistons & Rings, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.
This article by Simply Wall St is general in nature. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.