Are Investors Overlooking Returns On Capital At Akzo Nobel India (NSE:AKZOINDIA)?

There are a few key trends to look for if we want to identify the next multi-bagger. 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. So, when we ran our eye over Akzo Nobel India's (NSE:AKZOINDIA) trend of ROCE, we really liked what we saw.

Understanding 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. The formula for this calculation on Akzo Nobel India is:

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

0.22 = ₹3.0b ÷ (₹23b - ₹9.5b) (Based on the trailing twelve months to March 2020).

Thus, Akzo Nobel India has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.

View our latest analysis for Akzo Nobel India

Historical performance is a great place to start when researching a stock so above you can see the gauge for Akzo Nobel India's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Akzo Nobel India, check out these free graphs here.

What Does the ROCE Trend For Akzo Nobel India Tell Us?

We'd be pretty happy with returns on capital like Akzo Nobel India. Over the past five years, ROCE has remained relatively flat at around 22% and the business has deployed 37% more capital into its operations. Returns like this are the envy of most businesses and given they have repeatedly reinvested at these rates, that's even better. If Akzo Nobel India can keep this up, we'd be very optimistic about its future.

On a side note, Akzo Nobel India's current liabilities are still rather high at 41% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And the stock has followed suit returning a meaningful 43% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One more thing, we've spotted 1 warning sign facing Akzo Nobel India that you might find interesting.

Akzo Nobel India is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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This article by Simply Wall St is general in nature. 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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