Returns On Capital At Kothari Sugars and Chemicals (NSE:KOTARISUG) Have Hit The Brakes

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Kothari Sugars and Chemicals (NSE:KOTARISUG), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Kothari Sugars and Chemicals:

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

0.061 = ₹142m ÷ (₹3.2b - ₹835m) (Based on the trailing twelve months to December 2021).

So, Kothari Sugars and Chemicals has an ROCE of 6.1%. Ultimately, that's a low return and it under-performs the Food industry average of 13%.

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 Does the ROCE Trend For Kothari Sugars and Chemicals Tell Us?

There hasn't been much to report for Kothari Sugars and Chemicals' returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Kothari Sugars and Chemicals in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 26% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

What We Can Learn From Kothari Sugars and Chemicals' ROCE

In a nutshell, Kothari Sugars and Chemicals has been trudging along with the same returns from the same amount of capital over the last five years. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 159% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing, we've spotted 2 warning signs facing Kothari Sugars and Chemicals that you might find interesting.

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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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.