Gujarat State Fertilizers & Chemicals' (NSE:GSFC) Returns Have Hit A Wall

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Gujarat State Fertilizers & Chemicals (NSE:GSFC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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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 State Fertilizers & Chemicals, this is the formula:

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

0.031 = ₹4.5b ÷ (₹159b - ₹14b) (Based on the trailing twelve months to December 2024).

Thus, Gujarat State Fertilizers & Chemicals has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 13%.

See our latest analysis for Gujarat State Fertilizers & Chemicals

In the above chart we have measured Gujarat State Fertilizers & Chemicals' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Gujarat State Fertilizers & Chemicals .

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at Gujarat State Fertilizers & Chemicals. The company has consistently earned 3.1% for the last five years, and the capital employed within the business has risen 87% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 8.5% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line

In summary, Gujarat State Fertilizers & Chemicals has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 500% 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.

One more thing to note, we've identified 1 warning sign with Gujarat State Fertilizers & Chemicals and understanding this should be part of your investment process.

While Gujarat State 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.