Returns On Capital At Himadri Speciality Chemical (NSE:HSCL) Paint A Concerning Picture

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Himadri Speciality Chemical (NSE:HSCL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Himadri Speciality Chemical is:

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

0.18 = ₹5.9b ÷ (₹44b - ₹12b) (Based on the trailing twelve months to March 2024).

Thus, Himadri Speciality Chemical has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 13% generated by the Chemicals industry.

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.

The Trend Of ROCE

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 66% 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.

The Key Takeaway

To conclude, we've found that Himadri Speciality Chemical is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 376% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com