Fineotex Chemical (NSE:FCL) Might Be Having Difficulty Using Its Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So while Fineotex Chemical (NSE:FCL) has a high ROCE right now, lets see what we can decipher from how returns are changing.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Fineotex Chemical:

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

0.21 = ₹453m ÷ (₹2.7b - ₹497m) (Based on the trailing twelve months to June 2021).

So, Fineotex Chemical has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 16%.

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.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Fineotex Chemical, we didn't gain much confidence. To be more specific, while the ROCE is still high, it's fallen from 28% where it was five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Fineotex Chemical's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Fineotex Chemical. And the stock has done incredibly well with a 360% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you'd like to know about the risks facing Fineotex Chemical, we've discovered 2 warning signs 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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