What Do The Returns On Capital At Rallis India (NSE:RALLIS) Tell Us?

There are a few key trends to look for if we want to identify the next 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Rallis India (NSE:RALLIS) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Rallis India is:

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

0.15 = ₹2.4b ÷ (₹27b - ₹10b) (Based on the trailing twelve months to September 2020).

Therefore, Rallis India has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 14% generated by the Chemicals industry.

See our latest analysis for Rallis India

Above you can see how the current ROCE for Rallis India compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Rallis India Tell Us?

In terms of Rallis India's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 20%, but since then they've fallen to 15%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Rallis India's ROCE

Bringing it all together, while we're somewhat encouraged by Rallis India's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 38% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Rallis India does have some risks though, and we've spotted 1 warning sign for Rallis India that you might be interested in.

While Rallis India may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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