DMCC Speciality Chemicals (NSE:DMCC) Might Be Having Difficulty Using Its Capital Effectively

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at DMCC Speciality Chemicals (NSE:DMCC) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for DMCC Speciality Chemicals:

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

0.088 = ₹237m ÷ (₹3.9b - ₹1.2b) (Based on the trailing twelve months to September 2024).

So, DMCC Speciality Chemicals has an ROCE of 8.8%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 13%.

Check out our latest analysis for DMCC Speciality Chemicals

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how DMCC Speciality Chemicals has performed in the past in other metrics, you can view this free graph of DMCC Speciality Chemicals' past earnings, revenue and cash flow.

What Can We Tell From DMCC Speciality Chemicals' ROCE Trend?

When we looked at the ROCE trend at DMCC Speciality Chemicals, we didn't gain much confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 8.8%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On DMCC Speciality Chemicals' ROCE

Bringing it all together, while we're somewhat encouraged by DMCC Speciality Chemicals' reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 6.2% in the last three years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

DMCC Speciality Chemicals does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

While DMCC Speciality Chemicals may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.