The Returns On Capital At Gujarat Narmada Valley Fertilizers & Chemicals (NSE:GNFC) Don't Inspire Confidence

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. In light of that, when we looked at Gujarat Narmada Valley Fertilizers & Chemicals (NSE:GNFC) and its ROCE trend, we weren't exactly thrilled.

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

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)

0.088 = ₹9.2b ÷ (₹117b - ₹13b) (Based on the trailing twelve months to June 2023).

Therefore, Gujarat Narmada Valley Fertilizers & Chemicals has an ROCE of 8.8%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 14%.

View 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.

The Trend Of ROCE

In terms of Gujarat Narmada Valley Fertilizers & Chemicals' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 18%, but since then they've fallen to 8.8%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Gujarat Narmada Valley Fertilizers & Chemicals' ROCE

In summary, Gujarat Narmada Valley Fertilizers & Chemicals is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 125% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a separate note, we've found 2 warning signs for Gujarat Narmada Valley Fertilizers & Chemicals you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.