Ashoka Metcast (NSE:ASHOKAMET) Is Experiencing Growth In Returns On Capital

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. Speaking of which, we noticed some great changes in Ashoka Metcast's (NSE:ASHOKAMET) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Ashoka Metcast is:

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

0.095 = ₹114m ÷ (₹1.4b - ₹218m) (Based on the trailing twelve months to September 2024).

So, Ashoka Metcast has an ROCE of 9.5%. On its own that's a low return, but compared to the average of 5.9% generated by the Trade Distributors industry, it's much better.

View our latest analysis for Ashoka Metcast

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Ashoka Metcast's past further, check out this free graph covering Ashoka Metcast's past earnings, revenue and cash flow.

The Trend Of ROCE

The fact that Ashoka Metcast is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 9.5% on its capital. In addition to that, Ashoka Metcast is employing 421% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 15%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Ashoka Metcast has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Ashoka Metcast's ROCE

In summary, it's great to see that Ashoka Metcast has managed to break into profitability and is continuing to reinvest in its business. And since the stock has fallen 24% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Ashoka Metcast does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.

While Ashoka Metcast isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.