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If we want to find a potential multi-bagger, there are often underlying trends that can provide clues. One common approach is to try to find a company coming back on invested capital (ROCE) which increase in conjunction with growth Amount invested capital. This shows us that it is a compounding machine, capable of continuously reinvesting its earnings back into the business and generating higher returns. So when we looked at the ROCE trend of Tech Mahindra (NSE:TECHM) we really liked what we saw.
Return on Capital Employed (ROCE): What is it?
For those who are not sure what ROCE is, it measures the amount of pre-tax profit a company can generate from the capital employed in its operations. Analysts use this formula to calculate it for Tech Mahindra:
Return on invested capital = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.20 = 64 b ÷ (449 b – 125 b) (Based on trailing twelve months to June 2022).
therefore, Tech Mahindra has a ROCE of 20%. In absolute terms, that’s an excellent return and even better than the IT industry average of 12%.
Check out our latest analysis for Tech Mahindra
Above you can see how Tech Mahindra’s current ROCE compares to past returns on equity, but there’s only so much you can tell from the past. If you are interested, you can check out the analyst predictions in our free analyst forecast report for the company.
What does the ROCE trend tell us for Tech Mahindra?
The trends we have observed at Tech Mahindra are quite encouraging. Figures show that in the last five years, returns on invested capital have grown significantly to 20%. The company is effectively making more money per dollar of capital spent, and it is worth noting that the amount of capital has also increased, by 64%. Increasing returns on increasing amounts of capital are common among multi-bag buyers, and that’s why we’re impressed.
Key to take away
To summarize, Tech Mahindra has proven that it can reinvest in the business and generate higher returns on that invested capital, which is great. And given that the stock has performed exceptionally well over the past five years, investors are taking note of these patterns. In light of that, we think it’s worth taking a further look at this stock because if Tech Mahindra can sustain these trends, it could have a bright future.
One more thing, we noticed 1 warning sign faced with Tech Mahindra that you may find interesting.
If you want to see other high yielding companies, check out ours free list of high yielding companies with solid balance sheets here.
Valuation is complex, but we help make it simple.
Find out if Tech Mahindra is potentially overstated or understated by checking our comprehensive analysis, which includes fair value estimates, risks and caveats, dividends, insider transactions and financial condition.
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This Simply Wall St article 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 into account your goals or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest company announcements that are price sensitive or qualitative material. Simpli Wall St has no position in any of the stocks mentioned.
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