The Returns On Capital At Bhagiradha Chemicals & Industries (NSE:BHAGCHEM) Don't Inspire Confidence

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Although, when we looked at Bhagiradha Chemicals & Industries (NSE:BHAGCHEM), it didn't seem to tick all of these boxes.

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

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 Bhagiradha Chemicals & Industries, this is the formula:

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

0.08 = ₹362m ÷ (₹5.8b - ₹1.3b) (Based on the trailing twelve months to June 2024).

Therefore, Bhagiradha Chemicals & Industries has an ROCE of 8.0%. Ultimately, that's a low return and it under-performs 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're interested in investigating Bhagiradha Chemicals & Industries' past further, check out this free graph covering Bhagiradha Chemicals & Industries' past earnings, revenue and cash flow.

What Can We Tell From Bhagiradha Chemicals & Industries' ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 30% five years ago, while capital employed has grown 230%. That being said, Bhagiradha Chemicals & Industries raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Bhagiradha Chemicals & Industries probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, Bhagiradha Chemicals & Industries has done well to pay down its current liabilities to 22% 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. 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.

The Key Takeaway

In summary, we're somewhat concerned by Bhagiradha Chemicals & Industries' diminishing returns on increasing amounts of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 357%. 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'd like to know about the risks facing Bhagiradha Chemicals & Industries, we've discovered 2 warning signs that you should be aware of.

While Bhagiradha Chemicals & Industries 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.