Finolex Industries' (NSE:FINPIPE) Returns On Capital Not Reflecting Well On The Business

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Finolex Industries (NSE:FINPIPE), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. To calculate this metric for Finolex Industries, this is the formula:

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

0.079 = ₹4.7b ÷ (₹71b - ₹11b) (Based on the trailing twelve months to March 2024).

Thus, Finolex Industries has an ROCE of 7.9%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 13%.

View our latest analysis for Finolex Industries

In the above chart we have measured Finolex Industries' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Finolex Industries for free.

How Are Returns Trending?

When we looked at the ROCE trend at Finolex Industries, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.9% from 19% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

To conclude, we've found that Finolex Industries is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 241% 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.

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

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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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.

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