If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Ashoka Buildcon (NSE:ASHOKA) 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. To calculate this metric for Ashoka Buildcon, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = ₹13b ÷ (₹136b - ₹44b) (Based on the trailing twelve months to December 2020).
Therefore, Ashoka Buildcon has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 9.1% it's much better.
Check out our latest analysis for Ashoka Buildcon
Above you can see how the current ROCE for Ashoka Buildcon compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Ashoka Buildcon.
How Are Returns Trending?
You'd find it hard not to be impressed with the ROCE trend at Ashoka Buildcon. The figures show that over the last five years, returns on capital have grown by 254%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Ashoka Buildcon appears to been achieving more with less, since the business is using 32% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 32% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
Our Take On Ashoka Buildcon's ROCE
From what we've seen above, Ashoka Buildcon has managed to increase it's returns on capital all the while reducing it's capital base. Astute investors may have an opportunity here because the stock has declined 12% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.
Ashoka Buildcon does have some risks though, and we've spotted 2 warning signs for Ashoka Buildcon that you might be interested in.
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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This article by Simply Wall St is general in nature. 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.
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About NSEI:ASHOKA
Ashoka Buildcon
Engages in the infrastructure development business in India.
Solid track record with adequate balance sheet.
