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There Are Reasons To Feel Uneasy About BorgWarner's (NYSE:BWA) Returns On Capital

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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after briefly looking over the numbers, we don't think BorgWarner (NYSE:BWA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for BorgWarner:

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

0.12 = US$1.6b ÷ (US$17b - US$3.9b) (Based on the trailing twelve months to June 2021).

Therefore, BorgWarner has an ROCE of 12%. That's a pretty standard return and it's in line with the industry average of 12%.

See our latest analysis for BorgWarner

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Above you can see how the current ROCE for BorgWarner compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For BorgWarner Tell Us?

On the surface, the trend of ROCE at BorgWarner doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 12%. 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 BorgWarner's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that BorgWarner is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 46% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing, we've spotted 2 warning signs facing BorgWarner that you might find interesting.

While BorgWarner isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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