Is Chembond Chemicals (NSE:CHEMBOND) Likely To Turn Things Around?

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Chembond Chemicals (NSE:CHEMBOND) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Chembond Chemicals is:

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

0.033 = ₹94m ÷ (₹3.3b - ₹442m) (Based on the trailing twelve months to December 2020).

So, Chembond Chemicals has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 15%.

View our latest analysis for Chembond Chemicals

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

What Does the ROCE Trend For Chembond Chemicals Tell Us?

When we looked at the ROCE trend at Chembond Chemicals, we didn't gain much confidence. To be more specific, ROCE has fallen from 7.3% over the last five years. However it looks like Chembond Chemicals might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Chembond Chemicals has done well to pay down its current liabilities to 13% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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, Chembond Chemicals is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Additionally, the stock's total return to shareholders over the last year has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Chembond Chemicals (including 1 which shouldn't be ignored) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.
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