Why The 31% Return On Capital At Fineotex Chemical (NSE:FCL) Should Have Your Attention

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Fineotex Chemical (NSE:FCL) looks great, so lets see what the trend can tell us.

Understanding 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)

0.31 = ₹1.3b ÷ (₹5.3b - ₹1.2b) (Based on the trailing twelve months to September 2023).

Thus, Fineotex Chemical has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.

View our latest analysis for Fineotex Chemical

Above you can see how the current ROCE for Fineotex Chemical compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Fineotex Chemical here for free.

What Does the ROCE Trend For Fineotex Chemical Tell Us?

Investors would be pleased with what's happening at Fineotex Chemical. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 31%. Basically the business is earning more per dollar of capital invested and in addition to that, 165% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Fineotex Chemical's ROCE

To sum it up, Fineotex Chemical has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 1,024% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

While Fineotex Chemical looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether FCL is currently trading for a fair price.

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.