Mangalore Chemicals & Fertilizers (NSE:MANGCHEFER) Knows How To Allocate Capital Effectively

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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Mangalore Chemicals & Fertilizers' (NSE:MANGCHEFER) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Mangalore Chemicals & Fertilizers:

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

0.22 = ₹1.8b ÷ (₹24b - ₹16b) (Based on the trailing twelve months to December 2020).

So, Mangalore Chemicals & Fertilizers has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 15%.

View our latest analysis for Mangalore Chemicals & Fertilizers

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mangalore Chemicals & Fertilizers' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Mangalore Chemicals & Fertilizers, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Mangalore Chemicals & Fertilizers is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 36% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

Another thing to note, Mangalore Chemicals & Fertilizers has a high ratio of current liabilities to total assets of 66%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Mangalore Chemicals & Fertilizers' ROCE

In summary, we're delighted to see that Mangalore Chemicals & Fertilizers has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 87% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 3 warning signs for Mangalore Chemicals & Fertilizers you'll probably want to know about.

Mangalore Chemicals & Fertilizers is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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