Gujarat Narmada Valley Fertilizers & Chemicals (NSE:GNFC) Will Want To Turn Around Its Return Trends

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. 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.

What Is 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. 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)

0.09 = ₹9.0b ÷ (₹120b - ₹19b) (Based on the trailing twelve months to September 2023).

Therefore, Gujarat Narmada Valley Fertilizers & Chemicals has an ROCE of 9.0%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 14%.

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're interested in investigating Gujarat Narmada Valley Fertilizers & Chemicals' past further, check out this free graph of past earnings, revenue and cash flow.

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

When we looked at the ROCE trend at Gujarat Narmada Valley Fertilizers & Chemicals, we didn't gain much confidence. Around five years ago the returns on capital were 15%, but since then they've fallen to 9.0%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

In Conclusion...

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 169%. 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 Narmada Valley Fertilizers & Chemicals does come with some risks, and we've found 2 warning signs that you should be aware of.

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.

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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.