Khaitan Chemicals and Fertilizers (NSE:KHAICHEM) Will Want To Turn Around Its Return Trends

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. 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 Khaitan Chemicals and Fertilizers (NSE:KHAICHEM) and its ROCE trend, we weren't exactly thrilled.

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What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Khaitan Chemicals and Fertilizers:

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

0.054 = ₹140m ÷ (₹6.2b - ₹3.6b) (Based on the trailing twelve months to March 2025).

Therefore, Khaitan Chemicals and Fertilizers has an ROCE of 5.4%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 12%.

See our latest analysis for Khaitan Chemicals and Fertilizers

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

How Are Returns Trending?

When we looked at the ROCE trend at Khaitan Chemicals and Fertilizers, we didn't gain much confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 5.4%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a separate but related note, it's important to know that Khaitan Chemicals and Fertilizers has a current liabilities to total assets ratio of 58%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Khaitan Chemicals and Fertilizers is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 43% over the last three years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a final note, we've found 2 warning signs for Khaitan Chemicals and Fertilizers that we think you should be aware of.

While Khaitan Chemicals and Fertilizers 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.