There Are Reasons To Feel Uneasy About Gujarat Narmada Valley Fertilizers & Chemicals' (NSE:GNFC) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. 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?

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)

0.025 = ₹2.4b ÷ (₹107b - ₹11b) (Based on the trailing twelve months to June 2024).

So, Gujarat Narmada Valley Fertilizers & Chemicals has an ROCE of 2.5%. 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'd like to look at how Gujarat Narmada Valley Fertilizers & Chemicals has performed in the past in other metrics, you can view this free graph of 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 6.0% over the last five years. However it looks like Gujarat Narmada Valley Fertilizers & Chemicals might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Gujarat Narmada Valley Fertilizers & Chemicals' reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 209% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

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.

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.