Nahar Poly Films (NSE:NAHARPOLY) Is Reinvesting At Lower Rates Of Return

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Nahar Poly Films (NSE:NAHARPOLY) and its ROCE trend, we weren't exactly thrilled.

We've discovered 3 warning signs about Nahar Poly Films. View them for free.

Understanding 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. Analysts use this formula to calculate it for Nahar Poly Films:

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

0.023 = ₹219m ÷ (₹10b - ₹516m) (Based on the trailing twelve months to December 2024).

Thus, Nahar Poly Films has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 13%.

View our latest analysis for Nahar Poly Films

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 Nahar Poly Films has performed in the past in other metrics, you can view this free graph of Nahar Poly Films' past earnings, revenue and cash flow.

What Does the ROCE Trend For Nahar Poly Films Tell Us?

On the surface, the trend of ROCE at Nahar Poly Films doesn't inspire confidence. To be more specific, ROCE has fallen from 8.8% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Nahar Poly Films' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Nahar Poly Films. And the stock has done incredibly well with a 463% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you want to know some of the risks facing Nahar Poly Films we've found 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While Nahar Poly Films 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. 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.