The 20% Return On Capital At HeidelbergCement India (NSE:HEIDELBERG) Got Our Attention

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of HeidelbergCement India (NSE:HEIDELBERG) we really liked what we saw.

Understanding 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 HeidelbergCement India is:

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

0.20 = ₹3.8b ÷ (₹29b - ₹9.9b) (Based on the trailing twelve months to September 2020).

Therefore, HeidelbergCement India has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Basic Materials industry average of 11%.

View 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'd like to look at how HeidelbergCement India has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For HeidelbergCement India Tell Us?

HeidelbergCement India is showing promise given that its ROCE is trending up and to the right. 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 192% 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. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

The Bottom Line On HeidelbergCement India's ROCE

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 227% 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.

HeidelbergCement India does have some risks though, and we've spotted 1 warning sign for HeidelbergCement India that you might be interested in.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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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