There Are Reasons To Feel Uneasy About Balaji Amines' (NSE:BALAMINES) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Balaji Amines (NSE:BALAMINES) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. Analysts use this formula to calculate it for Balaji Amines:

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

0.15 = ₹2.8b ÷ (₹20b - ₹1.2b) (Based on the trailing twelve months to December 2023).

So, Balaji Amines has an ROCE of 15%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Chemicals industry average of 14%.

See our latest analysis for Balaji Amines

In the above chart we have measured Balaji Amines' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Balaji Amines for free.

What Can We Tell From Balaji Amines' ROCE Trend?

In terms of Balaji Amines' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 15% from 26% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Balaji Amines has decreased its current liabilities to 5.9% 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. 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.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Balaji Amines have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 386% 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.

Balaji Amines could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for BALAMINES on our platform quite valuable.

While Balaji Amines 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.