What Do The Returns On Capital At Chemfab Alkalis (NSE:CHEMFAB) Tell Us?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. 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 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. Analysts use this formula to calculate it for Chemfab Alkalis:

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

0.042 = ₹125m ÷ (₹3.4b - ₹469m) (Based on the trailing twelve months to September 2020).

Therefore, Chemfab Alkalis has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 14%.

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.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Chemfab Alkalis in recent years. Over the past four years, ROCE has remained relatively flat at around 4.2% and the business has deployed 106% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On Chemfab Alkalis' ROCE

Long story short, while Chemfab Alkalis has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 19% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Chemfab Alkalis has the makings of a multi-bagger.

Chemfab Alkalis does have some risks though, and we've spotted 5 warning signs for Chemfab Alkalis that you might be interested in.

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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