Here's What's Concerning About Gujarat Fluorochemicals' (NSE:FLUOROCHEM) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Gujarat Fluorochemicals (NSE:FLUOROCHEM), 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. Analysts use this formula to calculate it for Gujarat Fluorochemicals:

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

0.087 = ₹6.2b ÷ (₹95b - ₹24b) (Based on the trailing twelve months to September 2024).

So, Gujarat Fluorochemicals has an ROCE of 8.7%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 13%.

View our latest analysis for Gujarat Fluorochemicals

Above you can see how the current ROCE for Gujarat Fluorochemicals compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Gujarat Fluorochemicals .

What Can We Tell From Gujarat Fluorochemicals' ROCE Trend?

When we looked at the ROCE trend at Gujarat Fluorochemicals, we didn't gain much confidence. To be more specific, ROCE has fallen from 12% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Gujarat Fluorochemicals have fallen, meanwhile the business is employing more capital than it was five years ago. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 568%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Like most companies, Gujarat Fluorochemicals does come with some risks, and we've found 1 warning sign that you should be aware of.

While Gujarat Fluorochemicals may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.