Yahoo Finance CNH Industrial (NYSE:CNHI) Is Doing The Right Things To Multiply Its Share Price
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 on that note, CNH Industrial (NYSE:CNHI) looks quite promising in regards to its trends of return on capital.
What is Return On Capital Employed (ROCE)?
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. Analysts use this formula to calculate it for CNH Industrial:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.073 = US$2.7b ÷ (US$48b - US$10b) (Based on the trailing twelve months to September 2021).
Thus, CNH Industrial has an ROCE of 7.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 10%.
See our latest analysis for CNH Industrial
Above you can see how the current ROCE for CNH Industrial 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 CNH Industrial.
What Does the ROCE Trend For CNH Industrial Tell Us?
CNH Industrial has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 140% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Key Takeaway
As discussed above, CNH Industrial appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a staggering 122% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Like most companies, CNH Industrial does come with some risks, and we've found 1 warning sign that you should be aware of.
While CNH Industrial may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
