Reliance Chemotex Industries (NSE:RELCHEMQ) Will Be Hoping To Turn Its Returns On Capital Around

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Reliance Chemotex Industries (NSE:RELCHEMQ), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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 Reliance Chemotex Industries is:

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

0.048 = ₹152m ÷ (₹4.7b - ₹1.6b) (Based on the trailing twelve months to September 2024).

Therefore, Reliance Chemotex Industries has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Luxury industry average of 11%.

Check out our latest analysis for Reliance Chemotex Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Reliance Chemotex Industries' ROCE against it's prior returns. If you'd like to look at how Reliance Chemotex Industries has performed in the past in other metrics, you can view this free graph of Reliance Chemotex Industries' past earnings, revenue and cash flow.

What Can We Tell From Reliance Chemotex Industries' ROCE Trend?

In terms of Reliance Chemotex Industries' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.8% from 14% five years ago. 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 may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Reliance Chemotex Industries' ROCE

Bringing it all together, while we're somewhat encouraged by Reliance Chemotex Industries' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 30% over the last year, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Reliance Chemotex Industries does have some risks, we noticed 5 warning signs (and 2 which are potentially serious) we think you should know about.

While Reliance Chemotex Industries 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.