We Like These Underlying Trends At National Fertilizers (NSE:NFL)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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 looked at National Fertilizers (NSE:NFL) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for National Fertilizers, this is the formula:

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

0.15 = ₹7.4b ÷ (₹146b - ₹95b) (Based on the trailing twelve months to June 2020).

Thus, National Fertilizers has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 13% generated by the Chemicals industry.

Check out our latest analysis for National 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'd like to look at how National Fertilizers has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From National Fertilizers' ROCE Trend?

We're pretty happy with how the ROCE has been trending at National Fertilizers. We found that the returns on capital employed over the last five years have risen by 274%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 26% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

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 65% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

In Conclusion...

In a nutshell, we're pleased to see that National Fertilizers has been able to generate higher returns from less capital. And with a respectable 42% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

National Fertilizers does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are a bit unpleasant...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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