A Look Into Asian Paints' (NSE:ASIANPAINT) Impressive Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Asian Paints' (NSE:ASIANPAINT) ROCE trend, we were very happy with what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Asian Paints, this is the formula:

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

0.31 = ₹45b ÷ (₹204b - ₹59b) (Based on the trailing twelve months to June 2021).

So, Asian Paints has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 17%.

View our latest analysis for Asian Paints

In the above chart we have measured Asian Paints' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Asian Paints.

How Are Returns Trending?

Asian Paints deserves to be commended in regards to it's returns. The company has employed 95% more capital in the last five years, and the returns on that capital have remained stable at 31%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Asian Paints can keep this up, we'd be very optimistic about its future.

The Bottom Line On Asian Paints' ROCE

In summary, we're delighted to see that Asian Paints has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. And the stock has done incredibly well with a 188% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

While Asian Paints looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether ASIANPAINT is currently trading for a fair price.

Asian Paints is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.
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