Stock Analysis

Ashtead Group (LON:AHT) Has More To Do To Multiply In Value Going Forward

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LSE:AHT
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What are the early trends we should look for to identify a stock that could 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. With that in mind, the ROCE of Ashtead Group (LON:AHT) looks decent, right now, so lets see what the trend of returns can tell us.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Ashtead Group:

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

0.15 = US$1.8b ÷ (US$13b - US$1.3b) (Based on the trailing twelve months to July 2021).

Therefore, Ashtead Group has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 13% generated by the Trade Distributors industry.

See our latest analysis for Ashtead Group

roce
LSE:AHT Return on Capital Employed November 15th 2021

Above you can see how the current ROCE for Ashtead Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Ashtead Group Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 83% more capital in the last five years, and the returns on that capital have remained stable at 15%. Since 15% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Key Takeaway

The main thing to remember is that Ashtead Group has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 394% return they've received 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.

If you want to continue researching Ashtead Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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