Capital Allocation Trends At Fineotex Chemical (NSE:FCL) Aren't Ideal

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Fineotex Chemical (NSE:FCL) and its ROCE trend, we weren't exactly thrilled.

What is 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. To calculate this metric for Fineotex Chemical, this is the formula:

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

0.18 = ₹344m ÷ (₹2.2b - ₹239m) (Based on the trailing twelve months to December 2020).

Thus, Fineotex Chemical has an ROCE of 18%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Chemicals industry average of 15%.

View our latest analysis for Fineotex Chemical

Historical performance is a great place to start when researching a stock so above you can see the gauge for Fineotex Chemical's ROCE against it's prior returns. If you're interested in investigating Fineotex Chemical's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Fineotex Chemical's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 18% from 28% five years ago. However it looks like Fineotex Chemical might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Fineotex Chemical's ROCE

In summary, Fineotex Chemical is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 122% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you want to continue researching Fineotex Chemical, you might be interested to know about the 2 warning signs that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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