Kothari Petrochemicals (NSE:KOTHARIPET) Knows How to Allocate Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Kothari Petrochemicals' (NSE:KOTHARIPET) trend of ROCE, we really liked what we saw.

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 Kothari Petrochemicals:

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

0.23 = ₹275m ÷ (₹1.6b - ₹378m) (Based on the trailing twelve months to December 2020).

Therefore, Kothari Petrochemicals has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 15%.

See our latest analysis for Kothari Petrochemicals

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

What Does the ROCE Trend For Kothari Petrochemicals Tell Us?

It's hard not to be impressed by Kothari Petrochemicals' returns on capital. Over the past five years, ROCE has remained relatively flat at around 23% and the business has deployed 68% more capital into its operations. Now considering ROCE is an attractive 23%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

On a side note, Kothari Petrochemicals has done well to reduce current liabilities to 24% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On Kothari Petrochemicals' ROCE

Kothari Petrochemicals has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And the stock has followed suit returning a meaningful 43% to shareholders over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

On a separate note, we've found 2 warning signs for Kothari Petrochemicals you'll probably want to know about.

Kothari Petrochemicals is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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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