The Returns On Capital At Himadri Speciality Chemical (NSE:HSCL) Don't Inspire Confidence

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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)

0.17 = ₹4.7b ÷ (₹42b - ₹15b) (Based on the trailing twelve months to September 2023).

So, Himadri Speciality Chemical has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 14% generated by the Chemicals industry.

Check out our latest analysis for Himadri Speciality Chemical

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're interested in investigating Himadri Speciality Chemical's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Himadri Speciality Chemical's ROCE Trending?

On the surface, the trend of ROCE at Himadri Speciality Chemical doesn't inspire confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 17%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Himadri Speciality Chemical's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 102% 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.

If you'd like to know more about Himadri Speciality Chemical, we've spotted 3 warning signs, and 1 of them shouldn't be ignored.

While Himadri Speciality Chemical 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.