Ashoka Buildcon (NSE:ASHOKA) Is Experiencing Growth In Returns On Capital

If you're looking for a multi-bagger, there's a few things to 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. So when we looked at Ashoka Buildcon (NSE:ASHOKA) and its trend of ROCE, we really liked what we saw.

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 Ashoka Buildcon:

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

0.14 = ₹14b ÷ (₹142b - ₹44b) (Based on the trailing twelve months to March 2021).

Thus, Ashoka Buildcon has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.2% generated by the Construction industry.

See our latest analysis for Ashoka Buildcon

In the above chart we have measured Ashoka Buildcon's 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 Ashoka Buildcon here for free.

What Does the ROCE Trend For Ashoka Buildcon Tell Us?

Ashoka Buildcon's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 86% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 31% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

Our Take On Ashoka Buildcon's ROCE

In summary, we're delighted to see that Ashoka Buildcon has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Ashoka Buildcon does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is concerning...

While Ashoka Buildcon 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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