Capital Investments At Fairchem Organics (NSE:FAIRCHEMOR) Point To A Promising Future

If you're looking for a multi-bagger, there's a few things to 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at Fairchem Organics' (NSE:FAIRCHEMOR) ROCE trend, we were very happy with what we saw.

Understanding 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. The formula for this calculation on Fairchem Organics is:

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

0.22 = ₹674m ÷ (₹3.3b - ₹261m) (Based on the trailing twelve months to June 2024).

Therefore, Fairchem Organics has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 14%.

View our latest analysis for Fairchem Organics

Historical performance is a great place to start when researching a stock so above you can see the gauge for Fairchem Organics' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Fairchem Organics.

What Does the ROCE Trend For Fairchem Organics Tell Us?

We'd be pretty happy with returns on capital like Fairchem Organics. Over the past four years, ROCE has remained relatively flat at around 22% and the business has deployed 98% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.

On a side note, Fairchem Organics has done well to reduce current liabilities to 7.8% of total assets over the last four 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.

In Conclusion...

Fairchem Organics has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. However, despite the favorable fundamentals, the stock has fallen 46% over the last three years, so there might be an opportunity here for astute investors. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

One final note, you should learn about the 2 warning signs we've spotted with Fairchem Organics (including 1 which is a bit concerning) .

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.