Is NACL Industries (NSE:NACLIND) A Future Multi-bagger?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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 on that note, NACL Industries (NSE:NACLIND) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for NACL Industries:

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

0.17 = ₹745m ÷ (₹10b - ₹5.7b) (Based on the trailing twelve months to September 2020).

So, NACL Industries has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 14% generated by the Chemicals industry.

View our latest analysis for NACL Industries

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

How Are Returns Trending?

The trends we've noticed at NACL Industries are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 81%. So we're very much inspired by what we're seeing at NACL Industries thanks to its ability to profitably reinvest capital.

On a side note, NACL Industries' current liabilities are still rather high at 57% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

To sum it up, NACL Industries has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Astute investors may have an opportunity here because the stock has declined 10% in the last three years. With that in mind, we believe the promising trends warrant this stock for further investigation.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for NACL Industries (of which 1 is potentially serious!) that you should know about.

While NACL 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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