We Like Fertilisers and Chemicals Travancore's (NSE:FACT) Returns And Here's How They're Trending

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Fertilisers and Chemicals Travancore's (NSE:FACT) 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. 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)

0.38 = ₹6.2b ÷ (₹58b - ₹42b) (Based on the trailing twelve months to September 2023).

Thus, Fertilisers and Chemicals Travancore has an ROCE of 38%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.

Check out 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 of past earnings, revenue and cash flow.

So How Is Fertilisers and Chemicals Travancore's ROCE Trending?

Investors would be pleased with what's happening at Fertilisers and Chemicals Travancore. The data shows that returns on capital have increased substantially over the last five years to 38%. Basically the business is earning more per dollar of capital invested and in addition to that, 303% more capital is being employed now too. 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 72%, 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

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 1,771% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

Like most companies, Fertilisers and Chemicals Travancore does come with some risks, and we've found 1 warning sign that you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.