Fairchem Organics (NSE:FAIRCHEMOR) Is Very Good At Capital Allocation

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Fairchem Organics (NSE:FAIRCHEMOR) looks great, so lets see what the trend can tell us.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Fairchem Organics, this is the formula:

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

0.41 = ₹1.0b ÷ (₹3.2b - ₹674m) (Based on the trailing twelve months to June 2022).

Therefore, Fairchem Organics has an ROCE of 41%. That's a fantastic return and not only that, it outpaces the average of 17% earned by companies in a similar industry.

Check out the opportunities and risks within the IN Chemicals industry.

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'd like to look at how Fairchem Organics has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The trends we've noticed at Fairchem Organics are quite reassuring. The data shows that returns on capital have increased substantially over the last two years to 41%. The amount of capital employed has increased too, by 65%. So we're very much inspired by what we're seeing at Fairchem Organics thanks to its ability to profitably reinvest capital.

The Bottom Line On Fairchem Organics' ROCE

All in all, it's terrific to see that Fairchem Organics is reaping the rewards from prior investments and is growing its capital base. And given the stock has remained rather flat over the last year, there might be an opportunity here if other metrics are strong. So researching this company further and determining whether or not these trends will continue seems justified.

On a separate note, we've found 1 warning sign for Fairchem Organics you'll probably want to know about.

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.