Himadri Speciality Chemical (NSE:HSCL) Is Reinvesting At Lower Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Himadri Speciality Chemical (NSE:HSCL) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Himadri Speciality Chemical:

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

0.19 = ₹6.9b ÷ (₹45b - ₹8.1b) (Based on the trailing twelve months to September 2024).

Therefore, Himadri Speciality Chemical has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 12% it's much better.

Check out our latest analysis for Himadri Speciality Chemical

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

So How Is Himadri Speciality Chemical's ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 24% five years ago, while the business's capital employed increased by 91%. That being said, Himadri Speciality Chemical raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Himadri Speciality Chemical's earnings and if they change as a result from the capital raise.

On a related note, Himadri Speciality Chemical has decreased its current liabilities to 18% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Himadri Speciality Chemical's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Himadri Speciality Chemical is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 621% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we've found 1 warning sign for Himadri Speciality Chemical that we think you should be aware of.

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.