Returns On Capital At Gujarat Alkalies and Chemicals (NSE:GUJALKALI) Paint A Concerning Picture

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after investigating Gujarat Alkalies and Chemicals (NSE:GUJALKALI), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Gujarat Alkalies and Chemicals:

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

0.035 = ₹2.3b ÷ (₹72b - ₹6.1b) (Based on the trailing twelve months to June 2021).

So, Gujarat Alkalies and Chemicals has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 18%.

See our latest analysis for Gujarat Alkalies and Chemicals

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gujarat Alkalies and Chemicals' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Gujarat Alkalies and Chemicals, check out these free graphs here.

So How Is Gujarat Alkalies and Chemicals' ROCE Trending?

In terms of Gujarat Alkalies and Chemicals' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.5% from 8.0% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

In Conclusion...

In summary, Gujarat Alkalies and Chemicals is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 93% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Gujarat Alkalies and Chemicals does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

While Gujarat Alkalies and 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.

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.

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