Returns On Capital Are Showing Encouraging Signs At Chaman Metallics (NSE:CMNL)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Chaman Metallics (NSE:CMNL) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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)

0.046 = ₹133m ÷ (₹3.2b - ₹329m) (Based on the trailing twelve months to September 2024).

Therefore, Chaman Metallics has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 14%.

View 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.

What Can We Tell From Chaman Metallics' ROCE Trend?

We're delighted to see that Chaman Metallics is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 4.6% on its capital. And unsurprisingly, like most companies trying to break into the black, Chaman Metallics is utilizing 723% 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.

The Bottom Line On Chaman Metallics' ROCE

To the delight of most shareholders, Chaman Metallics has now broken into profitability. Considering the stock has delivered 6.1% to its stockholders over the last year, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

Chaman Metallics does have some risks, we noticed 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

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. 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.