Chaman Metallics (NSE:CMNL) Shareholders Will Want The ROCE Trajectory To Continue

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Chaman Metallics' (NSE:CMNL) returns on capital, so let's have a look.

Understanding 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. To calculate this metric for Chaman Metallics, this is the formula:

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

0.075 = ₹160m ÷ (₹2.4b - ₹301m) (Based on the trailing twelve months to March 2024).

Therefore, Chaman Metallics has an ROCE of 7.5%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 15%.

See our latest analysis for Chaman Metallics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chaman Metallics' ROCE against it's prior returns. If you'd like to look at how Chaman Metallics has performed in the past in other metrics, you can view this free graph of Chaman Metallics' past earnings, revenue and cash flow.

The Trend Of ROCE

Chaman Metallics has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 7.5% on its capital. And unsurprisingly, like most companies trying to break into the black, Chaman Metallics is utilizing 586% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 12% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

What We Can Learn From Chaman Metallics' ROCE

Long story short, we're delighted to see that Chaman Metallics' reinvestment activities have paid off and the company is now profitable. Since the stock has returned a solid 24% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing: We've identified 3 warning signs with Chaman Metallics (at least 2 which don't sit too well with us) , and understanding these would certainly be useful.

While Chaman Metallics 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.