Many Would Be Envious Of Aarti Industries' (NSE:AARTIIND) Excellent Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So, when we ran our eye over Aarti Industries' (NSE:AARTIIND) trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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 Aarti Industries is:

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

0.24 = ₹16b ÷ (₹87b - ₹21b) (Based on the trailing twelve months to December 2021).

Thus, Aarti Industries has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 18% earned by companies in a similar industry.

View our latest analysis for Aarti Industries

In the above chart we have measured Aarti Industries' 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 Aarti Industries here for free.

The Trend Of ROCE

It's hard not to be impressed by Aarti Industries' returns on capital. The company has employed 228% more capital in the last five years, and the returns on that capital have remained stable at 24%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.

On a side note, Aarti Industries has done well to reduce current liabilities to 24% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

Our Take On Aarti Industries' ROCE

In summary, we're delighted to see that Aarti Industries has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable 338% return to those who've held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

On a separate note, we've found 2 warning signs for Aarti Industries you'll probably want to know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.