Here's What To Make Of Manali Petrochemicals' (NSE:MANALIPETC) Returns On 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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Manali Petrochemicals (NSE:MANALIPETC), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Manali Petrochemicals is:

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

0.11 = ₹614m ÷ (₹6.8b - ₹1.4b) (Based on the trailing twelve months to September 2020).

So, Manali Petrochemicals has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the Chemicals industry average it falls behind.

View our latest analysis for Manali 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'd like to look at how Manali Petrochemicals has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Manali Petrochemicals' ROCE Trending?

When we looked at the ROCE trend at Manali Petrochemicals, we didn't gain much confidence. To be more specific, ROCE has fallen from 27% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Manali Petrochemicals has done well to pay down its current liabilities to 21% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Manali Petrochemicals' ROCE

In summary, we're somewhat concerned by Manali Petrochemicals' diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 81% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know about the risks facing Manali Petrochemicals, we've discovered 2 warning signs that you should be aware of.

While Manali Petrochemicals may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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