The Trends At AksharChem (India) (NSE:AKSHARCHEM) That You Should Know About

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at AksharChem (India) (NSE:AKSHARCHEM) and its ROCE trend, we weren't exactly thrilled.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for AksharChem (India), this is the formula:

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

0.064 = ₹180m ÷ (₹3.2b - ₹439m) (Based on the trailing twelve months to June 2020).

Thus, AksharChem (India) has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 14%.

See our latest analysis for AksharChem (India)

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 AksharChem (India), check out these free graphs here.

What Can We Tell From AksharChem (India)'s ROCE Trend?

In terms of AksharChem (India)'s historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 30% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, AksharChem (India) has decreased its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On AksharChem (India)'s ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for AksharChem (India) have fallen, meanwhile the business is employing more capital than it was five years ago. Unsurprisingly then, the stock has dived 72% over the last three years, so investors are recognizing these changes and don't like the company's prospects. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

AksharChem (India) does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is a bit concerning...

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