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

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating India Glycols (NSE:INDIAGLYCO), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on India Glycols is:

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

0.095 = ₹2.9b ÷ (₹51b - ₹20b) (Based on the trailing twelve months to September 2023).

So, India Glycols has an ROCE of 9.5%. 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 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'd like to look at how India Glycols has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is India Glycols' ROCE Trending?

On the surface, the trend of ROCE at India Glycols doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.5% from 17% five years ago. However it looks like India Glycols might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that India Glycols is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 189% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

India Glycols does have some risks though, and we've spotted 2 warning signs for India Glycols that you might be interested in.

While India Glycols 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.