Under The Bonnet, Mangalore Chemicals & Fertilizers' (NSE:MANGCHEFER) Returns Look Impressive

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Mangalore Chemicals & Fertilizers' (NSE:MANGCHEFER) returns on capital, so let's have a look.

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 Mangalore Chemicals & Fertilizers:

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

0.21 = ₹1.6b ÷ (₹28b - ₹20b) (Based on the trailing twelve months to June 2020).

Therefore, Mangalore Chemicals & Fertilizers has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 13%.

Check out our latest analysis for Mangalore Chemicals & Fertilizers

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 Mangalore Chemicals & Fertilizers, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Mangalore Chemicals & Fertilizers' ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 44% over the last five years. 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.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 72% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Mangalore Chemicals & Fertilizers' ROCE

In summary, we're delighted to see that Mangalore Chemicals & Fertilizers has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 26% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to know some of the risks facing Mangalore Chemicals & Fertilizers we've found 4 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

Mangalore Chemicals & Fertilizers is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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