Kothari Sugars and Chemicals (NSE:KOTARISUG) Is Experiencing Growth In Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So when we looked at Kothari Sugars and Chemicals (NSE:KOTARISUG) and its trend of ROCE, we really liked what we saw.

Understanding 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. To calculate this metric for Kothari Sugars and Chemicals, this is the formula:

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

0.085 = ₹189m ÷ (₹3.4b - ₹1.2b) (Based on the trailing twelve months to March 2021).

So, Kothari Sugars and Chemicals has an ROCE of 8.5%. In absolute terms, that's a low return and it also under-performs the Food industry average of 12%.

See our latest analysis for Kothari Sugars and Chemicals

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 want to delve into the historical earnings, revenue and cash flow of Kothari Sugars and Chemicals, check out these free graphs here.

What Can We Tell From Kothari Sugars and Chemicals' ROCE Trend?

Kothari Sugars and Chemicals is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 608% over the last five years. 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. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

Our Take On Kothari Sugars and Chemicals' ROCE

To sum it up, Kothari Sugars and Chemicals is collecting higher returns from the same amount of capital, and that's impressive. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Kothari Sugars and Chemicals can keep these trends up, it could have a bright future ahead.

Kothari Sugars and Chemicals does have some risks though, and we've spotted 3 warning signs for Kothari Sugars and Chemicals that you might be interested in.

While Kothari Sugars and Chemicals may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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