There Are Reasons To Feel Uneasy About Diamines and Chemicals' (NSE:DIAMINESQ) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Diamines and Chemicals (NSE:DIAMINESQ) and its ROCE trend, we weren't exactly thrilled.

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What Is Return On Capital Employed (ROCE)?

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 Diamines and Chemicals, this is the formula:

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

0.028 = ₹48m ÷ (₹1.8b - ₹165m) (Based on the trailing twelve months to December 2024).

Thus, Diamines and Chemicals has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 13%.

Check out our latest analysis for Diamines and Chemicals

Historical performance is a great place to start when researching a stock so above you can see the gauge for Diamines and Chemicals' ROCE against it's prior returns. If you're interested in investigating Diamines and Chemicals' past further, check out this free graph covering Diamines and Chemicals' past earnings, revenue and cash flow .

What Can We Tell From Diamines and Chemicals' ROCE Trend?

We weren't thrilled with the trend because Diamines and Chemicals' ROCE has reduced by 94% over the last five years, while the business employed 172% more capital. Usually this isn't ideal, but given Diamines and Chemicals conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Diamines and Chemicals probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

In Conclusion...

In summary, we're somewhat concerned by Diamines and Chemicals' diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last year have experienced a 45% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to know some of the risks facing Diamines and Chemicals we've found 4 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

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.