Himadri Speciality Chemical (NSE:HSCL) Will Want To Turn Around Its Return Trends

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. In light of that, when we looked at Himadri Speciality Chemical (NSE:HSCL) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Himadri Speciality Chemical, this is the formula:

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

0.17 = ₹4.1b ÷ (₹37b - ₹12b) (Based on the trailing twelve months to June 2023).

Therefore, Himadri Speciality Chemical has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Chemicals industry average of 15%.

See 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 of past earnings, revenue and cash flow.

How Are Returns Trending?

We weren't thrilled with the trend because Himadri Speciality Chemical's ROCE has reduced by 33% over the last five years, while the business employed 39% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. 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.

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 Himadri Speciality Chemical. In light of this, the stock has only gained 11% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Himadri Speciality Chemical (of which 1 doesn't sit too well with us!) 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.