The Returns On Capital At Gulshan Polyols (NSE:GULPOLY) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 briefly looking over the numbers, we don't think Gulshan Polyols (NSE:GULPOLY) 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?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Gulshan Polyols:

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

0.045 = ₹378m ÷ (₹12b - ₹3.1b) (Based on the trailing twelve months to June 2024).

Thus, Gulshan Polyols has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 14%.

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

So How Is Gulshan Polyols' ROCE Trending?

On the surface, the trend of ROCE at Gulshan Polyols doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.5% from 12% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Gulshan Polyols. And long term investors must be optimistic going forward because the stock has returned a huge 523% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Gulshan Polyols (of which 1 shouldn't be ignored!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.