The Returns On Capital At Insecticides (India) (NSE:INSECTICID) Don't Inspire Confidence

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 investigating Insecticides (India) (NSE:INSECTICID), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. Analysts use this formula to calculate it for Insecticides (India):

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

0.12 = ₹1.0b ÷ (₹13b - ₹4.6b) (Based on the trailing twelve months to December 2020).

Thus, Insecticides (India) has an ROCE of 12%. In isolation, that's a pretty standard return but against the Chemicals industry average of 16%, it's not as good.

See our latest analysis for Insecticides (India)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Insecticides (India)'s ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Insecticides (India), check out these free graphs here.

The Trend Of ROCE

When we looked at the ROCE trend at Insecticides (India), we didn't gain much confidence. To be more specific, ROCE has fallen from 17% over the last five years. However it looks like Insecticides (India) 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.

On a related note, Insecticides (India) has decreased its current liabilities to 36% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

Our Take On Insecticides (India)'s ROCE

In summary, Insecticides (India) is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 32% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Insecticides (India) does have some risks though, and we've spotted 1 warning sign for Insecticides (India) that you might be interested in.

While Insecticides (India) 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. 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.
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