If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Asahi India Glass' (NSE:ASAHIINDIA) returns on capital, so let's have a look.
Understanding 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. To calculate this metric for Asahi India Glass, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = ₹7.3b ÷ (₹38b - ₹11b) (Based on the trailing twelve months to September 2022).
Thus, Asahi India Glass has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Auto Components industry average of 13%.
Our analysis indicates that ASAHIINDIA is potentially overvalued!
In the above chart we have measured Asahi India Glass' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Asahi India Glass here for free.
So How Is Asahi India Glass' ROCE Trending?
The trends we've noticed at Asahi India Glass are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 27%. The amount of capital employed has increased too, by 42%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Key Takeaway
All in all, it's terrific to see that Asahi India Glass is reaping the rewards from prior investments and is growing its capital base. And with a respectable 74% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. 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.
Asahi India Glass does have some risks though, and we've spotted 1 warning sign for Asahi India Glass that you might be interested in.
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.
About NSEI:ASAHIINDIA
Asahi India Glass
An integrated glass and windows solutions company, manufactures and supplies various glass products in India and internationally.
Adequate balance sheet with questionable track record.
