There Are Reasons To Feel Uneasy About Gujarat Alkalies and Chemicals' (NSE:GUJALKALI) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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?

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 Alkalies and Chemicals is:

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

0.063 = ₹4.7b ÷ (₹83b - ₹8.4b) (Based on the trailing twelve months to June 2023).

Therefore, Gujarat Alkalies and Chemicals has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 14%.

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'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.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Gujarat Alkalies and Chemicals doesn't inspire confidence. To be more specific, ROCE has fallen from 16% over the last five years. 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 may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Gujarat Alkalies and Chemicals' ROCE

To conclude, we've found that Gujarat Alkalies and Chemicals is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 49% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 2 warning signs with Gujarat Alkalies and Chemicals (at least 1 which is potentially serious) , and understanding these would certainly be useful.

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.

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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.