National Fertilizers (NSE:NFL) Will Be Hoping To Turn Its Returns On Capital Around

When researching a stock for investment, what can tell us that the company is in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into National Fertilizers (NSE:NFL), the trends above didn't look too great.

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. To calculate this metric for National Fertilizers, this is the formula:

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

0.041 = ₹2.1b ÷ (₹94b - ₹45b) (Based on the trailing twelve months to December 2021).

Therefore, National Fertilizers has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 18%.

See our latest analysis for National Fertilizers

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

What Does the ROCE Trend For National Fertilizers Tell Us?

In terms of National Fertilizers' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 7.8% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on National Fertilizers becoming one if things continue as they have.

On a separate but related note, it's important to know that National Fertilizers has a current liabilities to total assets ratio of 47%, which we'd consider pretty high. 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 Key Takeaway

In summary, it's unfortunate that National Fertilizers is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 36% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing National Fertilizers we've found 3 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.

While National Fertilizers 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.