Capital allocation trends at Amara Raja Batteries (NSE:AMARAJABAT) are less than ideal

Did you know that there are financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; first growth come back on capital employed (ROCE) and on the other hand, growth amount capital employed. This shows us that it is a compounding machine, capable of continuously reinvesting its profits back into the business and generating higher returns. However, after investigating Amara Raja Batteries (NSE:AMARAJABAT), we don’t think current trends fit the mold of a multi-bagger.

Return on capital employed (ROCE): what is it?

For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. The formula for this calculation on Amara Raja batteries is:

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

0.13 = ₹6.5 billion ÷ (₹64 billion – ₹15 billion) (Based on the last twelve months to June 2022).

Thereby, Amara Raja Batteries posted a ROCE of 13%. This is a fairly standard return and is in line with the industry average of 13%.

Check out our latest review for Amara Raja batteries

NSEI:AMARAJABAT Return on Capital Employed September 28, 2022

Above you can see how the current ROCE of Amara Raja Batteries compares to its past returns on capital, but there is little you can say about the past. If you want to see what analysts predict for the future, you should check out our free report for Amara Raja Batteries.

The ROCE trend

When we looked at the ROCE trend at Amara Raja Batteries, we didn’t gain much confidence. Over the past five years, capital returns have declined to 13% from 22% five years ago. Although, given that revenue and the amount of assets used in the business have increased, it could suggest that the business is investing in growth and that the additional capital has resulted in a short-term reduction in ROCE. And if the capital increase generates additional returns, the company, and therefore the shareholders, will benefit in the long term.

Our view on the ROCE of Amara Raja batteries

In summary, despite lower returns in the short term, we are encouraged to see that Amara Raja Batteries is reinvesting for growth and has thus increased sales. These growth trends have not led to returns to growth, however, as the stock has fallen 27% over the past five years. Therefore, we recommend that you research this stock further to find out what other company fundamentals can show us.

One more thing we spotted 2 warning signs facing Amara Raja Batteries which might interest you.

Although Amara Raja batteries do not generate the highest output, check out this free list of companies that achieve high returns on equity with strong balance sheets.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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