Under The Bonnet, Kothari Petrochemicals' (NSE:KOTHARIPET) Returns Look Impressive

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Kothari Petrochemicals' (NSE:KOTHARIPET) look very promising so lets take a look.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Kothari Petrochemicals is:

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

0.36 = ₹839m ÷ (₹2.9b - ₹572m) (Based on the trailing twelve months to December 2023).

So, Kothari Petrochemicals has an ROCE of 36%. That's a fantastic return and not only that, it outpaces the average of 14% 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 , check out these free graphs detailing revenue and cash flow performance of Kothari Petrochemicals.

What Does the ROCE Trend For Kothari Petrochemicals Tell Us?

The trends we've noticed at Kothari Petrochemicals are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 36%. 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 141%. So we're very much inspired by what we're seeing at Kothari Petrochemicals thanks to its ability to profitably reinvest capital.

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. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line On Kothari Petrochemicals' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Kothari Petrochemicals has. Since the stock has returned a staggering 689% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 2 warning signs with Kothari Petrochemicals and understanding these should be part of your investment process.

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.