Balrampur Chini Mills (NSE:BALRAMCHIN) May Have Issues Allocating Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at Balrampur Chini Mills (NSE:BALRAMCHIN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Balrampur Chini Mills:

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

0.19 = ₹6.9b ÷ (₹42b - ₹4.6b) (Based on the trailing twelve months to December 2023).

Therefore, Balrampur Chini Mills has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 15% it's much better.

View our latest analysis for Balrampur Chini Mills

In the above chart we have measured Balrampur Chini Mills' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Balrampur Chini Mills for free.

What Does the ROCE Trend For Balrampur Chini Mills Tell Us?

In terms of Balrampur Chini Mills' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 25%, but since then they've fallen to 19%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Balrampur Chini Mills has decreased its current liabilities to 11% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

Our Take On Balrampur Chini Mills' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Balrampur Chini Mills. And long term investors must be optimistic going forward because the stock has returned a huge 187% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know about the risks facing Balrampur Chini Mills, we've discovered 1 warning sign that you should be aware of.

While Balrampur Chini Mills 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.