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

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Having said that, from a first glance at Gujarat Alkalies and Chemicals (NSE:GUJALKALI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

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. 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)

0.037 = ₹2.6b ÷ (₹78b - ₹7.4b) (Based on the trailing twelve months to September 2021).

Thus, Gujarat Alkalies and Chemicals has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 18%.

Check out our latest analysis for Gujarat Alkalies and 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're interested in investigating Gujarat Alkalies and Chemicals' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Gujarat Alkalies and Chemicals, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.7% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Gujarat Alkalies and Chemicals' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Gujarat Alkalies and Chemicals. And the stock has done incredibly well with a 110% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Gujarat Alkalies and Chemicals does have some risks though, and we've spotted 1 warning sign for Gujarat Alkalies and Chemicals that you might be interested in.

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.