Investors Could Be Concerned With ACC's (NSE:ACC) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. In light of that, when we looked at ACC (NSE:ACC) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on ACC is:

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

0.088 = ₹14b ÷ (₹221b - ₹64b) (Based on the trailing twelve months to September 2023).

Thus, ACC has an ROCE of 8.8%. On its own, that's a low figure but it's around the 7.4% average generated by the Basic Materials industry.

See our latest analysis for ACC

Above you can see how the current ROCE for ACC 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 ACC.

How Are Returns Trending?

When we looked at the ROCE trend at ACC, we didn't gain much confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 8.8%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On ACC's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that ACC is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 72% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing to note, we've identified 1 warning sign with ACC and understanding this should be part of your investment process.

While ACC 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. 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.