Chemfab Alkalis (NSE:CHEMFAB) Is Doing The Right Things To Multiply Its Share Price

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Chemfab Alkalis (NSE:CHEMFAB) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.01 = ₹31m ÷ (₹3.3b - ₹415m) (Based on the trailing twelve months to March 2021).

Thus, Chemfab Alkalis has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 15%.

Check out our latest analysis for Chemfab Alkalis

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'd like to look at how Chemfab Alkalis has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Chemfab Alkalis has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 1.0% on its capital. Not only that, but the company is utilizing 622% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 12%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line On Chemfab Alkalis' ROCE

In summary, it's great to see that Chemfab Alkalis has managed to break into profitability and is continuing to reinvest in its business. Given the stock has declined 18% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One final note, you should learn about the 3 warning signs we've spotted with Chemfab Alkalis (including 1 which is concerning) .

While Chemfab Alkalis 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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