Is Bodal Chemicals (NSE:BODALCHEM) Likely To Turn Things Around?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Bodal Chemicals (NSE:BODALCHEM), we don't think it's current trends fit the mold of a multi-bagger.

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 Bodal Chemicals:

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

0.052 = ₹511m ÷ (₹15b - ₹4.9b) (Based on the trailing twelve months to June 2020).

Thus, Bodal Chemicals has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 13%.

See our latest analysis for Bodal Chemicals

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

How Are Returns Trending?

Unfortunately, the trend isn't great with ROCE falling from 56% five years ago, while capital employed has grown 248%. That being said, Bodal Chemicals raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Bodal Chemicals 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, Bodal Chemicals has done well to pay down its current liabilities to 34% of total assets. That could partly explain why the ROCE has dropped. 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.

In Conclusion...

In summary, we're somewhat concerned by Bodal Chemicals' diminishing returns on increasing amounts of capital. However the stock has delivered a 56% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel to comfortable with the fundamentals so we'd be steering clear of this stock for now.

Bodal Chemicals does have some risks, we noticed 4 warning signs (and 1 which is a bit concerning) we think you should know about.

While Bodal Chemicals 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.

If you decide to trade Bodal Chemicals, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.