AksharChem (India) (NSE:AKSHARCHEM) Could Be Struggling To Allocate Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at AksharChem (India) (NSE:AKSHARCHEM) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for AksharChem (India):

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

0.057 = ₹169m ÷ (₹3.6b - ₹602m) (Based on the trailing twelve months to March 2021).

Thus, AksharChem (India) has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 15%.

View our latest analysis for AksharChem (India)

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

What Can We Tell From AksharChem (India)'s ROCE Trend?

When we looked at the ROCE trend at AksharChem (India), we didn't gain much confidence. Around five years ago the returns on capital were 28%, but since then they've fallen to 5.7%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, AksharChem (India) has decreased its current liabilities to 17% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On AksharChem (India)'s ROCE

To conclude, we've found that AksharChem (India) is reinvesting in the business, but returns have been falling. Since the stock has declined 20% over the last three years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know more about AksharChem (India), we've spotted 4 warning signs, and 1 of them is a bit concerning.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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