Be Wary Of TVS Motor (NSE:TVSMOTOR) And Its Returns On Capital

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. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So while TVS Motor (NSE:TVSMOTOR) has a high ROCE right now, lets see what we can decipher from how returns are changing.

Return On Capital Employed (ROCE): What Is It?

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 TVS Motor, this is the formula:

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

0.20 = ₹30b ÷ (₹311b – ₹158b) (Based on the trailing twelve months to December 2022).

So, TVS Motor has an ROCE of 20%. In absolute terms that’s a very respectable return and compared to the Auto industry average of 18% it’s pretty much on par.

View our latest analysis for TVS Motor

Above you can see how the current ROCE for TVS Motor 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.

What Does the ROCE Trend For TVS Motor Tell Us?

On the surface, the trend of ROCE at TVS Motor doesn’t inspire confidence. To be more specific, while the ROCE is still high, it’s fallen from 28% where it was five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Another thing to note, TVS Motor has a high ratio of current liabilities to total assets of 51%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we’d like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On TVS Motor’s ROCE

While returns have fallen for TVS Motor in recent times, we’re encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 68% to shareholders over the last five years. So should these growth trends continue, we’d be optimistic on the stock going forward.

If you’d like to know more about TVS Motor, we’ve spotted 2 warning signs, and 1 of them is a bit concerning.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.