Will AksharChem (India) (NSE:AKSHARCHEM) Multiply In Value Going Forward?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating AksharChem (India) (NSE:AKSHARCHEM), we don't think it's current trends fit the mold of a multi-bagger.

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)

0.06 = ₹170m ÷ (₹3.2b - ₹327m) (Based on the trailing twelve months to September 2020).

So, AksharChem (India) has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 16%.

Check out 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 want to delve into the historical earnings, revenue and cash flow of AksharChem (India), check out these free graphs here.

How Are Returns Trending?

On the surface, the trend of ROCE at AksharChem (India) doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.0% from 24% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, AksharChem (India) has done well to pay down its current liabilities to 10% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for AksharChem (India) have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 55% over the last three years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with AksharChem (India) (including 1 which is concerning) .

While AksharChem (India) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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