Returns On Capital Are A Standout For ESAB India (NSE:ESABINDIA)

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at ESAB India's (NSE:ESABINDIA) look very promising so lets take a look.

Return On Capital Employed (ROCE): What Is It?

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 ESAB India, this is the formula:

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

0.46 = ₹1.3b ÷ (₹4.6b - ₹1.8b) (Based on the trailing twelve months to September 2022).

Therefore, ESAB India has an ROCE of 46%. In absolute terms that's a great return and it's even better than the Machinery industry average of 15%.

View our latest analysis for ESAB India

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 ESAB India's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We're pretty happy with how the ROCE has been trending at ESAB India. We found that the returns on capital employed over the last five years have risen by 404%. The company is now earning ₹0.5 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 23% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 39% of its operations, which isn't ideal. 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.

What We Can Learn From ESAB India's ROCE

From what we've seen above, ESAB India has managed to increase it's returns on capital all the while reducing it's capital base. And a remarkable 474% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching ESAB India, you might be interested to know about the 1 warning sign that our analysis has discovered.

ESAB India 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.