Krishana Phoschem (NSE:KRISHANA) Is Looking To Continue Growing Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Krishana Phoschem's (NSE:KRISHANA) returns on capital, so let's have a look.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Krishana Phoschem is:

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

0.18 = ₹853m ÷ (₹8.0b - ₹3.4b) (Based on the trailing twelve months to September 2023).

Therefore, Krishana Phoschem has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 14% it's much better.

View our latest analysis for Krishana Phoschem

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'd like to look at how Krishana Phoschem has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Krishana Phoschem's ROCE Trend?

Investors would be pleased with what's happening at Krishana Phoschem. The data shows that returns on capital have increased substantially over the last five years to 18%. The amount of capital employed has increased too, by 276%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 42% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Krishana Phoschem's ROCE

All in all, it's terrific to see that Krishana Phoschem is reaping the rewards from prior investments and is growing its capital base. And a remarkable 1,075% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One final note, you should learn about the 4 warning signs we've spotted with Krishana Phoschem (including 2 which can't be ignored) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.