Astec LifeSciences (NSE:ASTEC) Could Be Struggling To Allocate Capital

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Astec LifeSciences (NSE:ASTEC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Astec LifeSciences is:

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

0.094 = ₹426m ÷ (₹9.8b - ₹5.3b) (Based on the trailing twelve months to March 2023).

Thus, Astec LifeSciences has an ROCE of 9.4%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 17%.

See our latest analysis for Astec LifeSciences

Above you can see how the current ROCE for Astec LifeSciences 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 Astec LifeSciences here for free.

SWOT Analysis for Astec LifeSciences

So How Is Astec LifeSciences' ROCE Trending?

When we looked at the ROCE trend at Astec LifeSciences, we didn't gain much confidence. To be more specific, ROCE has fallen from 32% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Another thing to note, Astec LifeSciences has a high ratio of current liabilities to total assets of 54%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Astec LifeSciences' ROCE

To conclude, we've found that Astec LifeSciences is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 121% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Astec LifeSciences does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Astec LifeSciences 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.