Why You Should Care About Asahi India Glass' (NSE:ASAHIINDIA) Strong Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at Asahi India Glass' (NSE:ASAHIINDIA) ROCE trend, we were very happy with what we saw.

What is Return On Capital Employed (ROCE)?

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. 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)

0.21 = ₹5.3b ÷ (₹38b - ₹13b) (Based on the trailing twelve months to December 2021).

So, Asahi India Glass has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

See our latest analysis for Asahi India Glass

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.

What The Trend Of ROCE Can Tell Us

Asahi India Glass deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 21% and the business has deployed 96% more capital into its operations. Now considering ROCE is an attractive 21%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

On a side note, Asahi India Glass has done well to reduce current liabilities to 34% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On Asahi India Glass' ROCE

Asahi India Glass has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And long term investors would be thrilled with the 118% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One more thing to note, we've identified 1 warning sign with Asahi India Glass and understanding it should be part of your investment process.

Asahi India Glass is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.