There Are Reasons To Feel Uneasy About Gulshan Polyols' (NSE:GULPOLY) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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.

What Is 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. To calculate this metric for Gulshan Polyols, this is the formula:

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

0.03 = ₹257m ÷ (₹12b - ₹3.1b) (Based on the trailing twelve months to March 2024).

So, Gulshan Polyols has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 13%.

See our latest analysis for Gulshan Polyols

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gulshan Polyols' ROCE against it's prior returns. If you're interested in investigating Gulshan Polyols' past further, check out this free graph covering Gulshan Polyols' past earnings, revenue and cash flow.

So How Is Gulshan Polyols' ROCE Trending?

In terms of Gulshan Polyols' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 3.0% from 12% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Gulshan Polyols is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 433% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we found 2 warning signs for Gulshan Polyols (1 makes us a bit uncomfortable) you should be aware of.

While Gulshan Polyols 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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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.