Gujarat Narmada Valley Fertilizers & Chemicals (NSE:GNFC) 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? 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. 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 Gujarat Narmada Valley Fertilizers & Chemicals (NSE:GNFC), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Gujarat Narmada Valley Fertilizers & Chemicals is:

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

0.02 = ₹2.0b ÷ (₹107b - ₹11b) (Based on the trailing twelve months to March 2024).

So, Gujarat Narmada Valley Fertilizers & Chemicals has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 13%.

Check out our latest analysis for Gujarat Narmada Valley Fertilizers & Chemicals

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gujarat Narmada Valley Fertilizers & Chemicals' ROCE against it's prior returns. If you're interested in investigating Gujarat Narmada Valley Fertilizers & Chemicals' past further, check out this free graph covering Gujarat Narmada Valley Fertilizers & Chemicals' past earnings, revenue and cash flow.

So How Is Gujarat Narmada Valley Fertilizers & Chemicals' ROCE Trending?

On the surface, the trend of ROCE at Gujarat Narmada Valley Fertilizers & Chemicals doesn't inspire confidence. To be more specific, ROCE has fallen from 11% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Gujarat Narmada Valley Fertilizers & Chemicals' ROCE

In summary, we're somewhat concerned by Gujarat Narmada Valley Fertilizers & Chemicals' diminishing returns on increasing amounts of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 284%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Like most companies, Gujarat Narmada Valley Fertilizers & Chemicals does come with some risks, and we've found 2 warning signs that you should be aware of.

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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