Returns On Capital At NACL Industries (NSE:NACLIND) Paint An Interesting Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over NACL Industries' (NSE:NACLIND) trend of ROCE, we liked what we saw.

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. The formula for this calculation on NACL Industries is:

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

0.11 = ₹446m ÷ (₹9.5b - ₹5.5b) (Based on the trailing twelve months to March 2020).

Thus, NACL Industries has an ROCE of 11%. In isolation, that's a pretty standard return but against the Chemicals industry average of 14%, it's not as good.

See our latest analysis for NACL Industries

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of NACL Industries, check out these free graphs here.

What Can We Tell From NACL Industries' ROCE Trend?

While the returns on capital are good, they haven't moved much. The company has employed 79% more capital in the last five years, and the returns on that capital have remained stable at 11%. 11% is a pretty standard return, and it provides some comfort knowing that NACL Industries has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a side note, NACL Industries' current liabilities are still rather high at 58% 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.

In Conclusion...

In the end, NACL Industries has proven its ability to adequately reinvest capital at good rates of return. And the stock has followed suit returning a meaningful 45% to shareholders over the last three years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you want to know some of the risks facing NACL Industries we've found 4 warning signs (2 are a bit concerning!) that you should be aware of before investing here.

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

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