BASF India (NSE:BASF) Could Become A Multi-Bagger

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Speaking of which, we noticed some great changes in BASF India's (NSE:BASF) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for BASF India:

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

0.33 = ₹8.1b ÷ (₹61b - ₹36b) (Based on the trailing twelve months to June 2022).

So, BASF India has an ROCE of 33%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 17%.

Our analysis indicates that BASF is potentially undervalued!

Historical performance is a great place to start when researching a stock so above you can see the gauge for BASF India's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of BASF India, check out these free graphs here.

What Can We Tell From BASF India's ROCE Trend?

BASF India is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 33%. The amount of capital employed has increased too, by 28%. So we're very much inspired by what we're seeing at BASF India thanks to its ability to profitably reinvest capital.

Another thing to note, BASF India has a high ratio of current liabilities to total assets of 59%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

To sum it up, BASF India has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 74% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we've found 1 warning sign for BASF India that we think you should be aware of.

BASF India is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.