Returns On Capital At Gulshan Polyols (NSE:GULPOLY) Have Hit The Brakes

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating Gulshan Polyols (NSE:GULPOLY), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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 Gulshan Polyols is:

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

0.086 = ₹574m ÷ (₹8.8b - ₹2.1b) (Based on the trailing twelve months to December 2022).

So, Gulshan Polyols has an ROCE of 8.6%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 17%.

View our latest analysis for Gulshan Polyols

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 Gulshan Polyols' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Gulshan Polyols' ROCE Trend?

There are better returns on capital out there than what we're seeing at Gulshan Polyols. Over the past five years, ROCE has remained relatively flat at around 8.6% and the business has deployed 96% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On Gulshan Polyols' ROCE

In conclusion, Gulshan Polyols has been investing more capital into the business, but returns on that capital haven't increased. Yet to long term shareholders the stock has gifted them an incredible 355% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing, we've spotted 3 warning signs facing Gulshan Polyols that you might find interesting.

While Gulshan Polyols 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.