We Like These Underlying Return On Capital Trends At Austal (ASX:ASB)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Austal (ASX:ASB) looks quite promising in regards to its trends of return on capital.

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 Austal:

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

0.13 = AU$136m ÷ (AU$1.3b - AU$272m) (Based on the trailing twelve months to December 2020).

So, Austal has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 7.8% generated by the Aerospace & Defense industry.

See our latest analysis for Austal

In the above chart we have measured Austal's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Austal here for free.

The Trend Of ROCE

Investors would be pleased with what's happening at Austal. Over the last five years, returns on capital employed have risen substantially to 13%. The amount of capital employed has increased too, by 25%. So we're very much inspired by what we're seeing at Austal thanks to its ability to profitably reinvest capital.

Our Take On Austal's ROCE

All in all, it's terrific to see that Austal is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Austal can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 2 warning signs we've spotted with Austal (including 1 which is a bit concerning) .

While Austal 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.

When trading Austal or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.