The Returns On Capital At Chemplast Sanmar (NSE:CHEMPLASTS) Don't Inspire Confidence

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Chemplast Sanmar (NSE:CHEMPLASTS), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Chemplast Sanmar:

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

0.0085 = ₹309m ÷ (₹57b - ₹21b) (Based on the trailing twelve months to December 2023).

Therefore, Chemplast Sanmar has an ROCE of 0.9%. 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 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 .

The Trend Of ROCE

On the surface, the trend of ROCE at Chemplast Sanmar doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.9% from 16% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On Chemplast Sanmar's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Chemplast Sanmar have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 21% return to shareholders over the last year, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you're still interested in Chemplast Sanmar it's worth checking out our FREE intrinsic value approximation for CHEMPLASTS to see if it's trading at an attractive price in other respects.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.