Returns On Capital At National Fertilizers (NSE:NFL) Have Stalled

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at National Fertilizers (NSE:NFL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 National Fertilizers:

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

0.088 = ₹4.3b ÷ (₹151b - ₹102b) (Based on the trailing twelve months to September 2022).

So, National Fertilizers has an ROCE of 8.8%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 17%.

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're interested in investigating National Fertilizers' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

There hasn't been much to report for National Fertilizers' returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect National Fertilizers to be a multi-bagger going forward.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 68% of total assets, this reported ROCE would probably be less than8.8% because total capital employed would be higher.The 8.8% ROCE could be even lower if current liabilities weren't 68% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

The Key Takeaway

We can conclude that in regards to National Fertilizers' returns on capital employed and the trends, there isn't much change to report on. And with the stock having returned a mere 17% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we've found 3 warning signs for National Fertilizers that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.