Is Chemfab Alkalis (NSE:CHEMFAB) Likely To Turn Things Around?

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Chemfab Alkalis (NSE:CHEMFAB) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Chemfab Alkalis:

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

0.018 = ₹54m ÷ (₹3.4b - ₹469m) (Based on the trailing twelve months to December 2020).

Therefore, Chemfab Alkalis has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 15%.

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 of 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. Over the last four years, returns on capital have decreased to 1.8% from 9.1% four years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Chemfab Alkalis' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Chemfab Alkalis have fallen, meanwhile the business is employing more capital than it was four years ago. It should come as no surprise then that the stock has fallen 20% over the last year, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we've found 4 warning signs for Chemfab Alkalis that we think 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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