Nahar Poly Films' (NSE:NAHARPOLY) Returns On Capital Are Heading Higher

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. So when we looked at Nahar Poly Films (NSE:NAHARPOLY) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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. 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)

0.092 = ₹907m ÷ (₹11b - ₹680m) (Based on the trailing twelve months to December 2022).

Therefore, Nahar Poly Films has an ROCE of 9.2%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 17%.

See 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 past earnings, revenue and cash flow.

How Are Returns Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 9.2%. The amount of capital employed has increased too, by 127%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Key Takeaway

All in all, it's terrific to see that Nahar Poly Films is reaping the rewards from prior investments and is growing its capital base. And a remarkable 422% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Nahar Poly Films can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 4 warning signs with Nahar Poly Films (at least 1 which is significant) , and understanding them would certainly be useful.

While Nahar Poly Films 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.