What Do The Returns On Capital At Himadri Speciality Chemical (NSE:HSCL) Tell Us?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Himadri Speciality Chemical (NSE:HSCL) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

0.049 = ₹962m ÷ (₹28b - ₹8.3b) (Based on the trailing twelve months to September 2020).

Therefore, Himadri Speciality Chemical has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 14%.

Check out our latest analysis for Himadri Speciality Chemical

In the above chart we have measured Himadri Speciality Chemical's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Himadri Speciality Chemical here for free.

What Does the ROCE Trend For Himadri Speciality Chemical Tell Us?

There are better returns on capital out there than what we're seeing at Himadri Speciality Chemical. The company has employed 40% more capital in the last five years, and the returns on that capital have remained stable at 4.9%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On Himadri Speciality Chemical's ROCE

In summary, Himadri Speciality Chemical has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 189% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 2 warning signs for Himadri Speciality Chemical that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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