Deepak Fertilisers And Petrochemicals (NSE:DEEPAKFERT) Is Achieving High Returns On Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at Deepak Fertilisers And Petrochemicals' (NSE:DEEPAKFERT) look very promising so lets take a look.

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

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 Deepak Fertilisers And Petrochemicals:

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

0.24 = ₹16b ÷ (₹87b - ₹22b) (Based on the trailing twelve months to June 2022).

Therefore, Deepak Fertilisers And Petrochemicals has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 17%.

Check out the opportunities and risks within the IN Chemicals industry.

In the above chart we have measured Deepak Fertilisers And Petrochemicals' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Deepak Fertilisers And Petrochemicals here for free.

What Does the ROCE Trend For Deepak Fertilisers And Petrochemicals Tell Us?

Investors would be pleased with what's happening at Deepak Fertilisers And Petrochemicals. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 24%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 156%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

One more thing to note, Deepak Fertilisers And Petrochemicals has decreased current liabilities to 26% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

What We Can Learn From Deepak Fertilisers And Petrochemicals' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Deepak Fertilisers And Petrochemicals has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Deepak Fertilisers And Petrochemicals does have some risks though, and we've spotted 2 warning signs for Deepak Fertilisers And Petrochemicals that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.