Why You Should Care About Fertilisers And Chemicals Travancore's (NSE:FACT) Strong 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Fertilisers And Chemicals Travancore (NSE:FACT) looks attractive right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Fertilisers And Chemicals Travancore, this is the formula:

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

0.48 = ₹7.2b ÷ (₹54b - ₹39b) (Based on the trailing twelve months to March 2023).

So, Fertilisers And Chemicals Travancore has an ROCE of 48%. That's a fantastic return and not only that, it outpaces the average of 16% 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.

What The Trend Of ROCE Can Tell Us

Fertilisers And Chemicals Travancore deserves to be commended in regards to it's returns. The company has consistently earned 48% for the last five years, and the capital employed within the business has risen 400% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

On a side note, Fertilisers And Chemicals Travancore has done well to reduce current liabilities to 72% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously. Although because current liabilities are still 72%, some of that risk is still prevalent.

Our Take On Fertilisers And Chemicals Travancore's ROCE

Fertilisers And Chemicals Travancore has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. On top of that, the stock has rewarded shareholders with a remarkable 528% return to those who've held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One more thing to note, we've identified 1 warning sign with Fertilisers And Chemicals Travancore and understanding this should be part of your investment process.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.