Gujarat Narmada Valley Fertilizers & Chemicals (NSE:GNFC) Might Have The Makings Of A Multi-Bagger

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Gujarat Narmada Valley Fertilizers & Chemicals (NSE:GNFC) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Gujarat Narmada Valley Fertilizers & Chemicals, this is the formula:

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

0.12 = ₹9.2b ÷ (₹84b - ₹9.6b) (Based on the trailing twelve months to March 2021).

Therefore, Gujarat Narmada Valley Fertilizers & Chemicals has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Chemicals industry average of 15%.

See our latest analysis for Gujarat Narmada Valley Fertilizers & Chemicals

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Gujarat Narmada Valley Fertilizers & Chemicals, check out these free graphs here.

What Does the ROCE Trend For Gujarat Narmada Valley Fertilizers & Chemicals Tell Us?

We like the trends that we're seeing from Gujarat Narmada Valley Fertilizers & Chemicals. The data shows that returns on capital have increased substantially over the last five years to 12%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 29%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Gujarat Narmada Valley Fertilizers & Chemicals has decreased current liabilities to 11% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Gujarat Narmada Valley Fertilizers & Chemicals has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

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

In summary, it's great to see that Gujarat Narmada Valley Fertilizers & Chemicals can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 197% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

Gujarat Narmada Valley Fertilizers & Chemicals does have some risks though, and we've spotted 1 warning sign for Gujarat Narmada Valley Fertilizers & Chemicals that you might be interested in.

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