The Returns At Kothari Sugars and Chemicals (NSE:KOTARISUG) Aren't Growing

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 briefly looking over the numbers, we don't think Kothari Sugars and Chemicals (NSE:KOTARISUG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. 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)

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

Thus, 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%.

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're interested in investigating Kothari Sugars and Chemicals' past further, check out this free graph of past earnings, revenue and cash flow.

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

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. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. 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. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Key Takeaway

We can conclude that in regards to Kothari Sugars and Chemicals' returns on capital employed and the trends, there isn't much change to report on. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 240% 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.

On a final note, we've found 2 warning signs for Kothari Sugars and Chemicals that we think you should be aware of.

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.