Here's What's Concerning About Gujarat State Fertilizers & Chemicals' (NSE:GSFC) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Gujarat State Fertilizers & Chemicals (NSE:GSFC), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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 State Fertilizers & Chemicals is:

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

0.05 = ₹6.6b ÷ (₹147b - ₹16b) (Based on the trailing twelve months to December 2023).

So, Gujarat State Fertilizers & Chemicals has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 14%.

Check out our latest analysis for Gujarat State Fertilizers & Chemicals

Above you can see how the current ROCE for Gujarat State Fertilizers & Chemicals compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Gujarat State Fertilizers & Chemicals for free.

What Does the ROCE Trend For Gujarat State Fertilizers & Chemicals Tell Us?

In terms of Gujarat State Fertilizers & Chemicals' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 8.3% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Gujarat State Fertilizers & Chemicals has decreased its current liabilities to 11% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

The Bottom Line

In summary, we're somewhat concerned by Gujarat State Fertilizers & Chemicals' diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 138% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Gujarat State Fertilizers & Chemicals does have some risks though, and we've spotted 2 warning signs for Gujarat State Fertilizers & Chemicals that you might be interested in.

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.