Investors Should Be Encouraged By Kothari Petrochemicals' (NSE:KOTHARIPET) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Kothari Petrochemicals' (NSE:KOTHARIPET) returns on capital, so let's have a look.

What is 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 Kothari Petrochemicals:

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

0.29 = ₹434m ÷ (₹1.9b - ₹366m) (Based on the trailing twelve months to September 2021).

So, Kothari Petrochemicals has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 17% earned by companies in a similar industry.

Check out our latest analysis for Kothari Petrochemicals

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Kothari Petrochemicals, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Kothari Petrochemicals. The data shows that returns on capital have increased substantially over the last five years to 29%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 88%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Kothari Petrochemicals has decreased current liabilities to 20% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Kothari Petrochemicals has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line

To sum it up, Kothari Petrochemicals has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 439% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Kothari Petrochemicals can keep these trends up, it could have a bright future ahead.

Like most companies, Kothari Petrochemicals does come with some risks, and we've found 2 warning signs that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.