Here's What's Concerning About India Glycols' (NSE:INDIAGLYCO) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at India Glycols (NSE:INDIAGLYCO), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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 India Glycols, this is the formula:

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

0.073 = ₹2.0b ÷ (₹43b - ₹16b) (Based on the trailing twelve months to December 2021).

Therefore, India Glycols has an ROCE of 7.3%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 18%.

See our latest analysis for India Glycols

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

What Can We Tell From India Glycols' ROCE Trend?

In terms of India Glycols' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.3% from 9.1% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, India Glycols has decreased its current liabilities to 37% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by India Glycols' reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 392% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One final note, you should learn about the 4 warning signs we've spotted with India Glycols (including 1 which shouldn't be ignored) .

While India Glycols isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.