Bhagiradha Chemicals & Industries' (NSE:BHAGCHEM) Returns Have Hit A Wall

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. That's why when we briefly looked at Bhagiradha Chemicals & Industries' (NSE:BHAGCHEM) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

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 Bhagiradha Chemicals & Industries:

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

0.16 = ₹547m ÷ (₹4.5b - ₹1.0b) (Based on the trailing twelve months to June 2023).

Thus, Bhagiradha Chemicals & Industries has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Chemicals industry average of 14%.

Check out our latest analysis for Bhagiradha Chemicals & Industries

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Bhagiradha Chemicals & Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

The trend of ROCE doesn't stand out much, but returns on a whole are decent. Over the past five years, ROCE has remained relatively flat at around 16% and the business has deployed 198% more capital into its operations. 16% is a pretty standard return, and it provides some comfort knowing that Bhagiradha Chemicals & Industries has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 23% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Key Takeaway

In the end, Bhagiradha Chemicals & Industries has proven its ability to adequately reinvest capital at good rates of return. And given the stock has only risen 0.3% over the last year, we'd suspect the market is beginning to recognize these trends. So to determine if Bhagiradha Chemicals & Industries is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

If you're still interested in Bhagiradha Chemicals & Industries it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Bhagiradha Chemicals & Industries 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. 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.