What Do The Returns On Capital At Manali Petrochemicals (NSE:MANALIPETC) Tell Us?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after briefly looking over the numbers, we don't think Manali Petrochemicals (NSE:MANALIPETC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Manali Petrochemicals is:

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

0.071 = ₹381m ÷ (₹6.6b - ₹1.3b) (Based on the trailing twelve months to June 2020).

Therefore, Manali Petrochemicals has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 14%.

See our latest analysis for Manali Petrochemicals

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 Manali Petrochemicals, check out these free graphs here.

So How Is Manali Petrochemicals' ROCE Trending?

On the surface, the trend of ROCE at Manali Petrochemicals doesn't inspire confidence. Around five years ago the returns on capital were 29%, but since then they've fallen to 7.1%. 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, Manali Petrochemicals has decreased its current liabilities to 19% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Manali Petrochemicals have fallen, meanwhile the business is employing more capital than it was five years ago. Investors must expect better things on the horizon though because the stock has risen 20% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to continue researching Manali Petrochemicals, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Manali Petrochemicals 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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