Investors Will Want Hindalco Industries' (NSE:HINDALCO) Growth In ROCE To Persist

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Hindalco Industries (NSE:HINDALCO) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Hindalco Industries, this is the formula:

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

0.17 = ₹242b ÷ (₹2.2t - ₹773b) (Based on the trailing twelve months to June 2022).

Thus, Hindalco Industries has an ROCE of 17%. That's a pretty standard return and it's in line with the industry average of 17%.

View our latest analysis for Hindalco Industries

In the above chart we have measured Hindalco 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 Hindalco Industries here for free.

What The Trend Of ROCE Can Tell Us

Hindalco Industries is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 34% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From Hindalco Industries' ROCE

To sum it up, Hindalco 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 85% 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 Hindalco Industries can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 3 warning signs we've spotted with Hindalco Industries (including 1 which shouldn't be ignored) .

While Hindalco Industries may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.