Returns Are Gaining Momentum At Deepak Fertilisers And Petrochemicals (NSE:DEEPAKFERT)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Deepak Fertilisers And Petrochemicals' (NSE:DEEPAKFERT) returns on capital, so let's have a look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Deepak Fertilisers And Petrochemicals, this is the formula:

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

0.13 = ₹11b ÷ (₹119b - ₹35b) (Based on the trailing twelve months to December 2023).

Thus, Deepak Fertilisers And Petrochemicals has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 14% generated by the Chemicals industry.

View our latest analysis for Deepak Fertilisers And Petrochemicals

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 to see what analysts are forecasting going forward, you should check out our free analyst report for Deepak Fertilisers And Petrochemicals .

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

The trends we've noticed at Deepak Fertilisers And Petrochemicals are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 125% more capital is being employed now too. So we're very much inspired by what we're seeing at Deepak Fertilisers And Petrochemicals thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 30%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

Our Take On Deepak Fertilisers And Petrochemicals' ROCE

In summary, it's great to see that Deepak Fertilisers And Petrochemicals can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 411% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know about the risks facing Deepak Fertilisers And Petrochemicals, we've discovered 3 warning signs that you should be aware of.

While Deepak Fertilisers And Petrochemicals 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.