Grasim Industries' (NSE:GRASIM) Returns On Capital Are Heading Higher

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Grasim Industries' (NSE:GRASIM) returns on capital, so let's have a look.

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 Grasim Industries, this is the formula:

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

0.068 = ₹165b ÷ (₹3.1t - ₹630b) (Based on the trailing twelve months to December 2022).

Thus, Grasim Industries has an ROCE of 6.8%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 9.3%.

View our latest analysis for Grasim Industries

In the above chart we have measured Grasim Industries' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Grasim Industries here for free.

SWOT Analysis for Grasim Industries

What Does the ROCE Trend For Grasim Industries Tell Us?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The data shows that returns on capital have increased substantially over the last five years to 6.8%. Basically the business is earning more per dollar of capital invested and in addition to that, 50% more capital is being employed now too. So we're very much inspired by what we're seeing at Grasim Industries thanks to its ability to profitably reinvest capital.

What We Can Learn From Grasim Industries' ROCE

To sum it up, Grasim Industries has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 65% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Grasim Industries can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 2 warning signs we've spotted with Grasim Industries (including 1 which makes us a bit uncomfortable) .

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.