India Pesticides (NSE:IPL) Will Be Hoping To Turn Its Returns On Capital Around

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Having said that, from a first glance at India Pesticides (NSE:IPL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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 Pesticides is:

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

0.084 = ₹749m ÷ (₹11b - ₹2.3b) (Based on the trailing twelve months to December 2024).

Thus, India Pesticides has an ROCE of 8.4%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 13%.

View our latest analysis for India Pesticides

Historical performance is a great place to start when researching a stock so above you can see the gauge for India Pesticides' ROCE against it's prior returns. If you'd like to look at how India Pesticides has performed in the past in other metrics, you can view this free graph of India Pesticides' past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at India Pesticides, we didn't gain much confidence. Around five years ago the returns on capital were 34%, but since then they've fallen to 8.4%. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by India Pesticides' reinvestment in its own business, we're aware that returns are shrinking. And in the last three years, the stock has given away 55% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with India Pesticides (including 1 which doesn't sit too well with us) .

While India Pesticides 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.