Be Wary Of Chemfab Alkalis (NSE:CHEMFAB) And Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Chemfab Alkalis (NSE:CHEMFAB) and its ROCE trend, we weren't exactly thrilled.

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 Chemfab Alkalis:

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

0.069 = ₹196m ÷ (₹3.3b - ₹470m) (Based on the trailing twelve months to December 2021).

Thus, Chemfab Alkalis has an ROCE of 6.9%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 18%.

Check out our latest analysis for Chemfab Alkalis

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chemfab Alkalis' ROCE against it's prior returns. If you're interested in investigating Chemfab Alkalis' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Chemfab Alkalis' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 9.1% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Chemfab Alkalis' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Chemfab Alkalis is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 19% over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

On a final note, we found 4 warning signs for Chemfab Alkalis (1 is concerning) you should be aware of.

While Chemfab Alkalis 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.