What trends should we look for it we want to identify stocks that can 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at ACC (NSE:ACC) so let's look a bit deeper.
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. Analysts use this formula to calculate it for ACC:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = ₹24b ÷ (₹191b - ₹48b) (Based on the trailing twelve months to June 2021).
Thus, ACC has an ROCE of 17%. That's a relatively normal return on capital, and it's around the 14% generated by the Basic Materials industry.
Check out 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, you can check out the forecasts from the analysts covering ACC here for free.
How Are Returns Trending?
ACC is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 55%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
What We Can Learn From ACC's ROCE
In summary, it's great to see that ACC can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 49% return over the last five years. 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.
Like most companies, ACC does come with some risks, and we've found 1 warning sign that you should be aware of.
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. 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.
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About NSEI:ACC
ACC
Engages in the manufacture and sale of cement and ready-mix concrete in India.
Very undervalued with flawless balance sheet.
