What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. That’s why when we briefly looked at Bajaj Auto’s (NSE:BAJAJ-AUTO) ROCE trend, we were very happy with what we saw.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Bajaj Auto:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.22 = ₹67b ÷ (₹351b – ₹47b) (Based on the trailing twelve months to September 2022).
Thus, Bajaj Auto has an ROCE of 22%. That’s a fantastic return and not only that, it outpaces the average of 18% earned by companies in a similar industry.
View our latest analysis for Bajaj Auto
In the above chart we have measured Bajaj Auto’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering Bajaj Auto here for free.
What Does the ROCE Trend For Bajaj Auto Tell Us?
Bajaj Auto deserves to be commended in regards to it’s returns. The company has employed 65% more capital in the last five years, and the returns on that capital have remained stable at 22%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that’s even better. If Bajaj Auto can keep this up, we’d be very optimistic about its future.
What We Can Learn From Bajaj Auto’s ROCE
Bajaj Auto has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we’re thrilled about. However, over the last five years, the stock has only delivered a 28% return to shareholders who held over that period. So because of the trends we’re seeing, we’d recommend looking further into this stock to see if it has the makings of a multi-bagger.
If you want to continue researching Bajaj Auto, you might be interested to know about the 1 warning sign that our analysis has discovered.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.
