Slowing Rates Of Return At Gokul Refoils & Solvent (NSE:GOKUL) Leave Little Room For Excitement

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after investigating Gokul Refoils & Solvent (NSE:GOKUL), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for Gokul Refoils & Solvent, this is the formula:

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

0.082 = ₹291m ÷ (₹9.2b - ₹5.6b) (Based on the trailing twelve months to September 2024).

Thus, Gokul Refoils & Solvent has an ROCE of 8.2%. Ultimately, that's a low return and it under-performs the Food industry average of 12%.

View our latest analysis for Gokul Refoils & Solvent

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Gokul Refoils & Solvent's past further, check out this free graph covering Gokul Refoils & Solvent's past earnings, revenue and cash flow.

What Can We Tell From Gokul Refoils & Solvent's ROCE Trend?

There are better returns on capital out there than what we're seeing at Gokul Refoils & Solvent. The company has consistently earned 8.2% for the last five years, and the capital employed within the business has risen 22% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 61% of total assets, this reported ROCE would probably be less than8.2% because total capital employed would be higher.The 8.2% ROCE could be even lower if current liabilities weren't 61% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

The Bottom Line On Gokul Refoils & Solvent's ROCE

Long story short, while Gokul Refoils & Solvent has been reinvesting its capital, the returns that it's generating haven't increased. Yet to long term shareholders the stock has gifted them an incredible 429% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we found 4 warning signs for Gokul Refoils & Solvent (3 shouldn't be ignored) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.