Why We Like The Returns At Astec LifeSciences (NSE:ASTEC)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Astec LifeSciences' (NSE:ASTEC) returns on capital, so let's have a look.

What is 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. The formula for this calculation on Astec LifeSciences is:

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

0.36 = ₹1.0b ÷ (₹6.2b - ₹3.3b) (Based on the trailing twelve months to September 2020).

Thus, Astec LifeSciences has an ROCE of 36%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 14%.

Check out 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 to see what analysts are forecasting going forward, you should check out our free report for Astec LifeSciences.

What Does the ROCE Trend For Astec LifeSciences Tell Us?

The trends we've noticed at Astec LifeSciences are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 36%. Basically the business is earning more per dollar of capital invested and in addition to that, 43% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, Astec LifeSciences' current liabilities are still rather high at 54% of total assets. 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.

The Bottom Line

To sum it up, Astec LifeSciences has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 485% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Astec LifeSciences does have some risks though, and we've spotted 2 warning signs for Astec LifeSciences that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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