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Titan (NSE:TITAN) Is Very Good At Capital Allocation


Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Titan (NSE:TITAN) looks great, so lets see what the trend can tell us.

Understanding 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 Titan is:

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

0.38 = ₹40b ÷ (₹212b – ₹105b) (Based on the trailing twelve months to June 2022).

Therefore, Titan has an ROCE of 38%. That’s a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

Check out our latest analysis for Titan

NSEI:TITAN Return on Capital Employed August 7th 2022

Above you can see how the current ROCE for Titan compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Titan.

What Can We Tell From Titan’s ROCE Trend?

The trends we’ve noticed at Titan are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 38%. The amount of capital employed has increased too, by 144%. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, a combination that’s common among multi-baggers.

Another thing to note, Titan has a high ratio of current liabilities to total assets of 50%. 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. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion…

To sum it up, Titan has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 308% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

Titan does have some risks though, and we’ve spotted 1 warning sign for Titan that you might be interested in.

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.

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.



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