Many Would Be Envious Of James Hardie Industries' (ASX:JHX) Excellent Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Ergo, when we looked at the ROCE trends at James Hardie Industries (ASX:JHX), we liked what we saw.

Understanding 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. Analysts use this formula to calculate it for James Hardie Industries:

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

0.22 = US$728m ÷ (US$4.0b - US$612m) (Based on the trailing twelve months to September 2021).

Therefore, James Hardie Industries has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 8.1% earned by companies in a similar industry.

Check out our latest analysis for James Hardie Industries

Above you can see how the current ROCE for James Hardie Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for James Hardie Industries.

What Can We Tell From James Hardie Industries' ROCE Trend?

James Hardie Industries deserves to be commended in regards to it's returns. The company has consistently earned 22% for the last five years, and the capital employed within the business has risen 106% in that time. Now considering ROCE is an attractive 22%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

Our Take On James Hardie Industries' ROCE

In summary, we're delighted to see that James Hardie Industries has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has done incredibly well with a 186% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

James Hardie Industries does have some risks though, and we've spotted 1 warning sign for James Hardie Industries that you might be interested in.

James Hardie Industries 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. 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.