Capital Allocation Trends At Balrampur Chini Mills (NSE:BALRAMCHIN) Aren't Ideal

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Balrampur Chini Mills (NSE:BALRAMCHIN), it didn't seem to tick all of these boxes.

What Is 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. 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)

0.16 = ₹6.2b ÷ (₹61b - ₹21b) (Based on the trailing twelve months to June 2024).

Therefore, Balrampur Chini Mills has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 13% 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Balrampur Chini Mills .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Balrampur Chini Mills doesn't inspire confidence. To be more specific, ROCE has fallen from 25% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. 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 35% of total assets. So we could link some of this to the decrease in ROCE. 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

In summary, despite lower returns in the short term, we're encouraged to see that Balrampur Chini Mills is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 314% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we found 3 warning signs for Balrampur Chini Mills (1 is a bit concerning) 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.