Investors Will Want Fertilisers and Chemicals Travancore's (NSE:FACT) Growth In ROCE To Persist

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at Fertilisers and Chemicals Travancore (NSE:FACT) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Fertilisers and Chemicals Travancore is:

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

0.082 = ₹1.3b ÷ (₹58b - ₹42b) (Based on the trailing twelve months to June 2024).

Therefore, Fertilisers and Chemicals Travancore has an ROCE of 8.2%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 14%.

See our latest analysis for Fertilisers and Chemicals Travancore

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

What The Trend Of ROCE Can Tell Us

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.2%. 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 213%. 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.

On a separate but related note, it's important to know that Fertilisers and Chemicals Travancore has a current liabilities to total assets ratio of 73%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Fertilisers and Chemicals Travancore's ROCE

All in all, it's terrific to see that Fertilisers and Chemicals Travancore is reaping the rewards from prior investments and is growing its capital base. 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.

If you'd like to know about the risks facing Fertilisers and Chemicals Travancore, we've discovered 2 warning signs that you should be aware of.

While Fertilisers and Chemicals Travancore 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.