We Like These Underlying Return On Capital Trends At Asbestos (CVE:AB.H)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. 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?

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. The formula for this calculation on Asbestos is:

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

0.17 = CA$6.3m ÷ (CA$41m - CA$4.9m) (Based on the trailing twelve months to September 2024).

So, Asbestos has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 1.4% it's much better.

See our latest analysis for Asbestos

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'd like to look at how Asbestos has performed in the past in other metrics, you can view this free graph of Asbestos' past earnings, revenue and cash flow.

What Does the ROCE Trend For Asbestos Tell Us?

We like the trends that we're seeing from Asbestos. Over the last five years, returns on capital employed have risen substantially to 17%. The amount of capital employed has increased too, by 34%. So we're very much inspired by what we're seeing at Asbestos thanks to its ability to profitably reinvest capital.

What We Can Learn From Asbestos' ROCE

To sum it up, Asbestos has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 244% 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 Asbestos can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 6 warning signs with Asbestos (at least 4 which make us uncomfortable) , and understanding them would certainly be useful.

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.