The Return Trends At Ashapura Minechem (NSE:ASHAPURMIN) Look Promising

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Ashapura Minechem (NSE:ASHAPURMIN) and its trend of ROCE, we really liked what we saw.

Understanding 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. The formula for this calculation on Ashapura Minechem is:

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

0.097 = ₹1.6b ÷ (₹30b - ₹14b) (Based on the trailing twelve months to June 2023).

So, Ashapura Minechem has an ROCE of 9.7%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 14%.

See our latest analysis for Ashapura Minechem

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're interested in investigating Ashapura Minechem's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Ashapura Minechem's ROCE Trend?

Ashapura Minechem has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 9.7% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Ashapura Minechem is utilizing 622% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 47%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

Our Take On Ashapura Minechem's ROCE

Long story short, we're delighted to see that Ashapura Minechem's reinvestment activities have paid off and the company is now profitable. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Ashapura Minechem (of which 1 is a bit concerning!) that you should know about.

While Ashapura Minechem 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.