Capital Allocation Trends At GOCL (NSE:GOCLCORP) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at GOCL (NSE:GOCLCORP) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on GOCL is:

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

0.0022 = ₹60m ÷ (₹29b - ₹2.3b) (Based on the trailing twelve months to September 2021).

Therefore, GOCL has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 17%.

See our latest analysis for GOCL

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 GOCL's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For GOCL Tell Us?

When we looked at the ROCE trend at GOCL, we didn't gain much confidence. Around five years ago the returns on capital were 1.6%, but since then they've fallen to 0.2%. However it looks like GOCL 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.

On a related note, GOCL has decreased its current liabilities to 7.9% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On GOCL's ROCE

Bringing it all together, while we're somewhat encouraged by GOCL's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 33% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a final note, we found 3 warning signs for GOCL (1 is significant) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.