Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in ACC's (NSE:ACC) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
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 ACC, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = ₹17b ÷ (₹206b - ₹60b) (Based on the trailing twelve months to June 2022).
Thus, ACC has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 10% generated by the Basic Materials industry.
View our latest analysis for ACC
In the above chart we have measured ACC'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 ACC here for free.
So How Is ACC's ROCE Trending?
We like the trends that we're seeing from ACC. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. The amount of capital employed has increased too, by 49%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Bottom Line On ACC's ROCE
All in all, it's terrific to see that ACC is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 40% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if ACC can keep these trends up, it could have a bright future ahead.
ACC does have some risks though, and we've spotted 2 warning signs for ACC that you might be interested in.
While ACC 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.
About NSEI:ACC
ACC
Engages in the manufacture and sale of cement and ready-mix concrete in India.
Flawless balance sheet and undervalued.
