Capital Allocation Trends At Uno Minda (NSE:UNOMINDA) Aren’t Ideal

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Uno Minda (NSE:UNOMINDA) and its ROCE trend, we weren’t exactly thrilled.

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. To calculate this metric for Uno Minda, this is the formula:

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

0.16 = ₹8.6b ÷ (₹83b – ₹30b) (Based on the trailing twelve months to June 2023).

Therefore, Uno Minda has an ROCE of 16%. In absolute terms, that’s a pretty normal return, and it’s somewhat close to the Auto Components industry average of 14%.

View our latest analysis for Uno Minda

Above you can see how the current ROCE for Uno Minda 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 Uno Minda.

So How Is Uno Minda’s ROCE Trending?

On the surface, the trend of ROCE at Uno Minda doesn’t inspire confidence. To be more specific, ROCE has fallen from 22% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Uno Minda’s ROCE

While returns have fallen for Uno Minda 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 done incredibly well with a 326% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we’d be optimistic on the stock going forward.

If you’re still interested in Uno Minda it’s worth checking out our FREE intrinsic value approximation to see if it’s trading at an attractive price in other respects.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.