Looking Into Cummins's Return On Capital Employed

According to Benzinga Pro, during Q1, Cummins CMI earned $806.00 million, a 25.16% increase from the preceding quarter. Cummins also posted a total of $8.45 billion in sales, a 8.79% increase since Q4. In Q4, Cummins earned $644.00 million, and total sales reached $7.77 billion.

Why Is ROCE Significant?

Return on Capital Employed is a measure of yearly pre-tax profit relative to capital employed by a business. Changes in earnings and sales indicate shifts in a company's ROCE. A higher ROCE is generally representative of successful growth of a company and is a sign of higher earnings per share in the future. A low or negative ROCE suggests the opposite. In Q1, Cummins posted an ROCE of 0.07%.

Keep in mind, while ROCE is a good measure of a company's recent performance, it is not a highly reliable predictor of a company's earnings or sales in the near future.

ROCE is a powerful metric for comparing the effectiveness of capital allocation for similar companies. A relatively high ROCE shows Cummins is potentially operating at a higher level of efficiency than other companies in its industry. If the company is generating high profits with its current level of capital, some of that money can be reinvested in more capital which will generally lead to higher returns and, ultimately, earnings per share (EPS) growth.

For Cummins, the positive return on capital employed ratio of 0.07% suggests that management is allocating their capital effectively. Effective capital allocation is a positive indicator that a company will achieve more durable success and favorable long-term returns.