Returns Are Gaining Momentum At Asbestos (CVE:AB.H)

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Asbestos (CVE:AB.H) so let's look a bit deeper.

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

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 Asbestos is:

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

0.088 = CA$2.5m ÷ (CA$32m - CA$3.0m) (Based on the trailing twelve months to March 2022).

Therefore, Asbestos has an ROCE of 8.8%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 3.3%.

View our latest analysis for Asbestos

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

What Can We Tell From Asbestos' ROCE Trend?

Asbestos is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 27% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

On a related note, the company's ratio of current liabilities to total assets has decreased to 9.4%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line

To bring it all together, Asbestos has done well to increase the returns it's generating from its capital employed. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Asbestos does come with some risks though, we found 6 warning signs in our investment analysis, and 5 of those are a bit concerning...

While Asbestos 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.

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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.