Here's What's Concerning About Chemfab Alkalis' (NSE:CHEMFAB) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Chemfab Alkalis (NSE:CHEMFAB) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Chemfab Alkalis is:

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

0.041 = ₹185m ÷ (₹5.3b - ₹886m) (Based on the trailing twelve months to September 2024).

Thus, Chemfab Alkalis has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 13%.

View 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 covering Chemfab Alkalis' past earnings, revenue and cash flow.

What Can We Tell From Chemfab Alkalis' ROCE Trend?

On the surface, the trend of ROCE at Chemfab Alkalis doesn't inspire confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 4.1%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

To conclude, we've found that Chemfab Alkalis is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 596% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One final note, you should learn about the 2 warning signs we've spotted with Chemfab Alkalis (including 1 which is a bit unpleasant) .

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. 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.