Returns At Reliance Chemotex Industries (NSE:RELCHEMQ) Appear To Be Weighed Down

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Reliance Chemotex Industries' (NSE:RELCHEMQ) trend of ROCE, we liked what we saw.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Reliance Chemotex Industries is:

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

0.10 = ₹241m ÷ (₹4.0b - ₹1.7b) (Based on the trailing twelve months to June 2023).

Therefore, Reliance Chemotex Industries has an ROCE of 10%. By itself that's a normal return on capital and it's in line with the industry's average returns of 10%.

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're interested in investigating Reliance Chemotex Industries' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Reliance Chemotex Industries Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 10% and the business has deployed 71% more capital into its operations. Since 10% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a separate but related note, it's important to know that Reliance Chemotex Industries has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Reliance Chemotex Industries' ROCE

In the end, Reliance Chemotex Industries has proven its ability to adequately reinvest capital at good rates of return. Therefore it's no surprise that shareholders have earned a respectable 23% return if they held over the last year. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you want to know some of the risks facing Reliance Chemotex Industries we've found 4 warning signs (1 can't be ignored!) that you should be aware of before investing here.

While Reliance Chemotex Industries 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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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.