Australia markets open in 6 hours 43 minutes
  • ALL ORDS

    7,503.50
    -50.50 (-0.67%)
     
  • AUD/USD

    0.6795
    -0.0022 (-0.32%)
     
  • ASX 200

    7,301.50
    -52.90 (-0.72%)
     
  • OIL

    80.34
    -0.88 (-1.08%)
     
  • GOLD

    1,797.30
    -3.80 (-0.21%)
     
  • BTC-AUD

    25,069.54
    -54.47 (-0.22%)
     
  • CMC Crypto 200

    404.33
    +2.91 (+0.72%)
     

Ashtead Group (LON:AHT) Has More To Do To Multiply In Value Going Forward

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Ashtead Group's (LON:AHT) trend of ROCE, we 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. To calculate this metric for Ashtead Group, this is the formula:

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

0.14 = US$2.1b ÷ (US$16b - US$1.5b) (Based on the trailing twelve months to July 2022).

Therefore, Ashtead Group has an ROCE of 14%. By itself that's a normal return on capital and it's in line with the industry's average returns of 14%.

View our latest analysis for Ashtead Group

roce
roce

In the above chart we have measured Ashtead Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Ashtead Group.

The Trend Of ROCE

While the current returns on capital are decent, they haven't changed much. The company has employed 95% more capital in the last five years, and the returns on that capital have remained stable at 14%. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line On Ashtead Group's ROCE

To sum it up, Ashtead Group has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 165% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you want to continue researching Ashtead Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Ashtead Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here