Why You Should Care About James Hardie Industries' (ASX:JHX) Strong Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of James Hardie Industries (ASX:JHX) looks attractive right now, so lets see what the trend of returns can tell us.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on James Hardie Industries is:

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

0.21 = US$778m ÷ (US$4.5b - US$697m) (Based on the trailing twelve months to March 2023).

Therefore, James Hardie Industries has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Basic Materials industry average of 3.5%.

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.

SWOT Analysis for James Hardie Industries

How Are Returns Trending?

We'd be pretty happy with returns on capital like James Hardie Industries. The company has consistently earned 21% for the last five years, and the capital employed within the business has risen 93% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

Our Take On James Hardie Industries' ROCE

James Hardie Industries has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. Therefore it's no surprise that shareholders have earned a respectable 92% return if they held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

On a final note, we found 2 warning signs for James Hardie Industries (1 is a bit unpleasant) you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.