We Think Kothari Petrochemicals (NSE:KOTHARIPET) Might Have The DNA Of A Multi-Bagger

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. With that in mind, the ROCE of Kothari Petrochemicals (NSE:KOTHARIPET) looks great, so lets see what the trend can tell us.

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. Analysts use this formula to calculate it for Kothari Petrochemicals:

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

0.32 = ₹704m ÷ (₹2.7b - ₹494m) (Based on the trailing twelve months to June 2023).

Thus, Kothari Petrochemicals has an ROCE of 32%. 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

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 Can We Tell From Kothari Petrochemicals' ROCE Trend?

We like the trends that we're seeing from Kothari Petrochemicals. Over the last five years, returns on capital employed have risen substantially to 32%. 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 128%. So we're very much inspired by what we're seeing at Kothari Petrochemicals thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 18%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

In Conclusion...

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 with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.

On a final note, we've found 3 warning signs for Kothari Petrochemicals that we think you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.