Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Tata Elxsi (NSE:TATAELXSI) looks attractive right now, so lets see what the trend of returns can tell us.
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. Analysts use this formula to calculate it for Tata Elxsi:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) (Total Assets – Current Liabilities)
0.47 = ₹6.6b (₹17b – ₹3.0b) (Based on the trailing twelve months to December 2021),
Therefore, Tata Elxsi has an ROCE of 47%. In absolute terms that’s a great return and it’s even better than the Software industry average of 13%.
Check out our latest analysis for Tata Elxsi
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 Tata Elxsi, check out these free graphs here.
What Does the ROCE Trend For Tata Elxsi Tell Us?
Tata Elxsi deserves to be commended in regards to it’s returns. The company has consistently earned 47% for the last five years, and the capital employed within the business has risen 189% in that time. With returns that high, it’s great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn’t surprise us if the company became a multi-bagger.
The Key Takeaway
In summary, we’re delighted to see that Tata Elxsi has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable 911% return to those who’ve held over the last five years. So while investors seem to be these promising trends, we still believe the stock deserves further research.
One more thing to note, we’ve identified 1 warning sign with Tata Elxsi and understanding this should be part of your investment process.
If you’d like to see other companies earning high returns, check out our free List of companies earning high returns with solid balance sheets here.
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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.
