Returns On Capital Signal Tricky Times Ahead For Gujarat Alkalies and Chemicals (NSE:GUJALKALI)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 briefly looking over the numbers, we don't think Gujarat Alkalies and Chemicals (NSE:GUJALKALI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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. To calculate this metric for Gujarat Alkalies and Chemicals, this is the formula:

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

0.03 = ₹1.7b ÷ (₹62b - ₹6.4b) (Based on the trailing twelve months to December 2020).

So, Gujarat Alkalies and Chemicals has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 16%.

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'd like to look at how Gujarat Alkalies and Chemicals has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Gujarat Alkalies and Chemicals doesn't inspire confidence. To be more specific, ROCE has fallen from 5.3% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On Gujarat Alkalies and Chemicals' ROCE

We're a bit apprehensive about Gujarat Alkalies and Chemicals because despite more capital being deployed in the business, returns on that capital and sales have both fallen. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 151%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Like most companies, Gujarat Alkalies and Chemicals does come with some risks, and we've found 2 warning signs that you should be aware of.

While Gujarat Alkalies and Chemicals may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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