Chambal Fertilisers and Chemicals (NSE:CHAMBLFERT) Looks To Prolong Its Impressive Returns

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over Chambal Fertilisers and Chemicals' (NSE:CHAMBLFERT) trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Chambal Fertilisers and Chemicals, this is the formula:

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

0.21 = ₹20b ÷ (₹133b - ₹38b) (Based on the trailing twelve months to June 2022).

Therefore, Chambal Fertilisers and Chemicals has an ROCE of 21%. On its own, that's a very good return and it's on par with the returns earned by companies in a similar industry.

See our latest analysis for Chambal Fertilisers and Chemicals

In the above chart we have measured Chambal Fertilisers and Chemicals' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Chambal Fertilisers and Chemicals.

So How Is Chambal Fertilisers and Chemicals' ROCE Trending?

We'd be pretty happy with returns on capital like Chambal Fertilisers and Chemicals. The company has consistently earned 21% for the last five years, and the capital employed within the business has risen 158% in that time. Now considering ROCE is an attractive 21%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

On a side note, Chambal Fertilisers and Chemicals has done well to reduce current liabilities to 29% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable 143% return to those who've held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Chambal Fertilisers and Chemicals does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.

Chambal Fertilisers and Chemicals 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.