HeidelbergCement India (NSE:HEIDELBERG) Knows How To Allocate Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. 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 HeidelbergCement India's (NSE:HEIDELBERG) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

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 HeidelbergCement India is:

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

0.22 = ₹4.2b ÷ (₹28b - ₹9.3b) (Based on the trailing twelve months to March 2020).

Thus, HeidelbergCement India has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Basic Materials industry average of 10%.

See our latest analysis for HeidelbergCement India

Historical performance is a great place to start when researching a stock so above you can see the gauge for HeidelbergCement India's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of HeidelbergCement India, check out these free graphs here.

What Can We Tell From HeidelbergCement India's ROCE Trend?

HeidelbergCement India has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 194% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

In Conclusion...

To bring it all together, HeidelbergCement India has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 166% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we've found 1 warning sign for HeidelbergCement India that we think you should be aware of.

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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