Returns On Capital At Mangalore Chemicals & Fertilizers (NSE:MANGCHEFER) Paint A Concerning Picture

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Mangalore Chemicals & Fertilizers (NSE:MANGCHEFER), it didn't seem to tick all of these boxes.

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. To calculate this metric for Mangalore Chemicals & Fertilizers, this is the formula:

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

0.16 = ₹1.4b ÷ (₹22b - ₹13b) (Based on the trailing twelve months to September 2021).

Therefore, Mangalore Chemicals & Fertilizers has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 17% generated by the Chemicals industry.

See our latest analysis for Mangalore Chemicals & Fertilizers

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 Mangalore Chemicals & Fertilizers has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Mangalore Chemicals & Fertilizers' ROCE Trending?

On the surface, the trend of ROCE at Mangalore Chemicals & Fertilizers doesn't inspire confidence. Over the last five years, returns on capital have decreased to 16% from 36% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Mangalore Chemicals & Fertilizers has decreased its current liabilities to 60% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 60% is still pretty high, so those risks are still somewhat prevalent.

In Conclusion...

In summary, Mangalore Chemicals & Fertilizers is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 64% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to continue researching Mangalore Chemicals & Fertilizers, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Mangalore Chemicals & Fertilizers isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.