Investors Could Be Concerned With Galaxy Surfactants' (NSE:GALAXYSURF) 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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Galaxy Surfactants (NSE:GALAXYSURF), we don't think it's current trends fit the mold of a multi-bagger.

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

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. Analysts use this formula to calculate it for Galaxy Surfactants:

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

0.19 = ₹3.3b ÷ (₹26b - ₹8.7b) (Based on the trailing twelve months to March 2022).

So, Galaxy Surfactants has an ROCE of 19%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Chemicals industry average of 16%.

View our latest analysis for Galaxy Surfactants

Above you can see how the current ROCE for Galaxy Surfactants 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 report for Galaxy Surfactants.

How Are Returns Trending?

On the surface, the trend of ROCE at Galaxy Surfactants doesn't inspire confidence. Around five years ago the returns on capital were 30%, but since then they've fallen to 19%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Galaxy Surfactants' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Galaxy Surfactants is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 148% to shareholders in the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know more about Galaxy Surfactants, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.

While Galaxy Surfactants isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.