Under The Bonnet, ESAB India's (NSE:ESABINDIA) Returns Look Impressive

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at ESAB India's (NSE:ESABINDIA) look very promising so lets take a look.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for ESAB India, this is the formula:

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

0.21 = ₹727m ÷ (₹4.6b - ₹1.1b) (Based on the trailing twelve months to June 2020).

Therefore, ESAB India has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Machinery industry average of 9.7%.

View our latest analysis for ESAB India

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of ESAB India, check out these free graphs here.

The Trend Of ROCE

ESAB India is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 125% 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. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Bottom Line

To sum it up, ESAB India is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 169% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if ESAB India can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing ESAB India, we've discovered 1 warning sign that you should be aware of.

ESAB 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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