Investors Could Be Concerned With Alkyl Amines Chemicals' (NSE:ALKYLAMINE) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Alkyl Amines Chemicals (NSE:ALKYLAMINE), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Alkyl Amines Chemicals, this is the formula:

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

0.17 = ₹2.1b ÷ (₹16b - ₹2.9b) (Based on the trailing twelve months to December 2023).

Thus, Alkyl Amines Chemicals has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Chemicals industry average of 14%.

View our latest analysis for Alkyl Amines Chemicals

Above you can see how the current ROCE for Alkyl Amines Chemicals compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Alkyl Amines Chemicals .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Alkyl Amines Chemicals doesn't inspire confidence. Around five years ago the returns on capital were 27%, but since then they've fallen to 17%. 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, Alkyl Amines Chemicals has done well to pay down its current liabilities to 19% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Alkyl Amines Chemicals' ROCE

In summary, we're somewhat concerned by Alkyl Amines Chemicals' diminishing returns on increasing amounts of capital. Since the stock has skyrocketed 526% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to continue researching Alkyl Amines Chemicals, you might be interested to know about the 1 warning sign that our analysis has discovered.

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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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.