Here’s What’s Happening With Returns At Kothari Sugars and Chemicals (NSE:KOTARISUG)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Kothari Sugars and Chemicals' (NSE:KOTARISUG) returns on capital, so let's have a look.

Understanding 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 Kothari Sugars and Chemicals is:

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

0.10 = ₹229m ÷ (₹3.2b - ₹997m) (Based on the trailing twelve months to December 2020).

So, Kothari Sugars and Chemicals has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 12% generated by the Food industry.

View our latest analysis for Kothari Sugars and Chemicals

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

So How Is Kothari Sugars and Chemicals' ROCE Trending?

Kothari Sugars and Chemicals has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 4,758% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

In Conclusion...

As discussed above, Kothari Sugars and Chemicals appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And a remarkable 125% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, Kothari Sugars and Chemicals does come with some risks, and we've found 3 warning signs that 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. 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.
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