Some Investors May Be Worried About Chemplast Sanmar's (NSE:CHEMPLASTS) Returns On Capital

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Chemplast Sanmar (NSE:CHEMPLASTS), the trends above didn't look too great.

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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 Chemplast Sanmar:

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

0.016 = ₹553m ÷ (₹61b - ₹26b) (Based on the trailing twelve months to December 2024).

Therefore, Chemplast Sanmar has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 13%.

Check out our latest analysis for Chemplast Sanmar

Above you can see how the current ROCE for Chemplast Sanmar compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Chemplast Sanmar .

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Chemplast Sanmar. Unfortunately the returns on capital have diminished from the 7.5% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Chemplast Sanmar to turn into a multi-bagger.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 43%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 1.6%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On Chemplast Sanmar's ROCE

In summary, it's unfortunate that Chemplast Sanmar is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 28% over the last three years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Like most companies, Chemplast Sanmar does come with some risks, and we've found 1 warning sign that you should be aware of.

While Chemplast Sanmar 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.