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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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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, the ROCE of James Hardie Industries (ASX:JHX) looks great, so lets see what the trend can tell us.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for James Hardie Industries:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = US$884m ÷ (US$4.9b - US$685m) (Based on the trailing twelve months to December 2024).
So, James Hardie Industries has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 8.2% earned by companies in a similar industry.
Check out our latest analysis for James Hardie Industries
Above you can see how the current ROCE for James Hardie Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for James Hardie Industries .
The Trend Of ROCE
James Hardie Industries is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 64% in that same time. 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.
What We Can Learn From James Hardie Industries' ROCE
To sum it up, James Hardie Industries is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 200% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if James Hardie Industries can keep these trends up, it could have a bright future ahead.