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

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Gujarat Narmada Valley Fertilizers & Chemicals:

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

0.18 = ₹15b ÷ (₹92b - ₹13b) (Based on the trailing twelve months to September 2021).

Thus, Gujarat Narmada Valley Fertilizers & Chemicals has an ROCE of 18%. That's a relatively normal return on capital, and it's around the 17% generated by the Chemicals industry.

See 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 want to delve into the historical earnings, revenue and cash flow of Gujarat Narmada Valley Fertilizers & Chemicals, check out these free graphs here.

What Can We Tell From Gujarat Narmada Valley Fertilizers & Chemicals' ROCE Trend?

Gujarat Narmada Valley Fertilizers & Chemicals is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 18%. 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 36%. So we're very much inspired by what we're seeing at Gujarat Narmada Valley Fertilizers & Chemicals thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 14%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

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 with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching Gujarat Narmada Valley Fertilizers & Chemicals, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Gujarat Narmada Valley Fertilizers & Chemicals isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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