Shareholders Would Enjoy A Repeat Of Astra Industrial Group's (TADAWUL:1212) Recent Growth In Returns

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. And in light of that, the trends we're seeing at Astra Industrial Group's (TADAWUL:1212) look very promising so lets take 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. The formula for this calculation on Astra Industrial Group is:

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

0.21 = ر.س334m ÷ (ر.س3.0b - ر.س1.4b) (Based on the trailing twelve months to March 2021).

So, Astra Industrial Group has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 5.8% earned by companies in a similar industry.

See our latest analysis for Astra Industrial Group

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

What The Trend Of ROCE Can Tell Us

We're pretty happy with how the ROCE has been trending at Astra Industrial Group. We found that the returns on capital employed over the last five years have risen by 2,889%. The company is now earning ر.س0.2 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 41% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 46% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On Astra Industrial Group's ROCE

In the end, Astra Industrial Group has proven it's capital allocation skills are good with those higher returns from less amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we've found 4 warning signs for Astra Industrial Group that we think you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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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