Returns on Capital Paint A Bright Future For Fertilisers and Chemicals Travancore (NSE:FACT)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. So when we looked at the ROCE trend of Fertilisers and Chemicals Travancore (NSE:FACT) we really liked what we saw.

Understanding 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. Analysts use this formula to calculate it for Fertilisers and Chemicals Travancore:

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

0.26 = ₹4.1b ÷ (₹58b - ₹42b) (Based on the trailing twelve months to December 2023).

Thus, Fertilisers and Chemicals Travancore has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 14%.

See our latest analysis for Fertilisers and Chemicals Travancore

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Fertilisers and Chemicals Travancore.

What Does the ROCE Trend For Fertilisers and Chemicals Travancore Tell Us?

Fertilisers and Chemicals Travancore is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 26%. Basically the business is earning more per dollar of capital invested and in addition to that, 303% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, Fertilisers and Chemicals Travancore's current liabilities are still rather high at 72% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On 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 a remarkable 1,572% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to continue researching Fertilisers and Chemicals Travancore, you might be interested to know about the 1 warning sign that our analysis has discovered.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.