The Trend Of High Returns At Manali Petrochemicals (NSE:MANALIPETC) Has Us Very Interested

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Manali Petrochemicals' (NSE:MANALIPETC) returns on capital, so let's have a look.

What is 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. The formula for this calculation on Manali Petrochemicals is:

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

0.31 = ₹1.7b ÷ (₹6.8b - ₹1.4b) (Based on the trailing twelve months to December 2020).

So, Manali Petrochemicals has an ROCE of 31%. 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 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?

Investors would be pleased with what's happening at Manali Petrochemicals. Over the last five years, returns on capital employed have risen substantially to 31%. The amount of capital employed has increased too, by 92%. So we're very much inspired by what we're seeing at Manali Petrochemicals thanks to its ability to profitably reinvest capital.

One more thing to note, Manali Petrochemicals has decreased current liabilities to 21% 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.

What We Can Learn From Manali Petrochemicals' ROCE

In summary, it's great to see that Manali Petrochemicals can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. 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 Manali Petrochemicals can keep these trends up, it could have a bright future ahead.

On a final note, we've found 1 warning sign for Manali Petrochemicals that we think you should be aware of.

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.

If you decide to trade Manali Petrochemicals, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.