NACL Industries (NSE:NACLIND) Knows How To Allocate Capital Effectively

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Speaking of which, we noticed some great changes in NACL Industries' (NSE:NACLIND) 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. To calculate this metric for NACL Industries, this is the formula:

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

0.20 = ₹1.1b ÷ (₹12b - ₹6.6b) (Based on the trailing twelve months to December 2021).

Thus, NACL Industries has an ROCE of 20%. On its own, that's a very good return and it's on par with the returns earned by companies in a similar industry.

View our latest analysis for NACL Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for NACL Industries' ROCE against it's prior returns. If you'd like to look at how NACL Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is NACL Industries' ROCE Trending?

The trends we've noticed at NACL Industries are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 20%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 106%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Another thing to note, NACL Industries has a high ratio of current liabilities to total assets of 54%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

To sum it up, NACL Industries has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 231% 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.

On a final note, we found 2 warning signs for NACL Industries (1 is concerning) you should be aware of.

NACL Industries 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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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.