Investors Could Be Concerned With Asahi Songwon Colors' (NSE:ASAHISONG) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after investigating Asahi Songwon Colors (NSE:ASAHISONG), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Asahi Songwon Colors:

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

0.12 = ₹372m ÷ (₹4.3b - ₹1.1b) (Based on the trailing twelve months to September 2021).

Therefore, Asahi Songwon Colors has an ROCE of 12%. In absolute terms, that's a pretty standard return but compared to the Chemicals industry average it falls behind.

Check out our latest analysis for Asahi Songwon Colors

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'd like to look at how Asahi Songwon Colors has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Asahi Songwon Colors doesn't inspire confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 12%. 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.

The Bottom Line On Asahi Songwon Colors' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Asahi Songwon Colors is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 52% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

Asahi Songwon Colors does have some risks, we noticed 4 warning signs (and 1 which is significant) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.