Investors Could Be Concerned With Oriental Carbon & Chemicals' (NSE:OCCL) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Oriental Carbon & Chemicals (NSE:OCCL), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Oriental Carbon & Chemicals:

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

0.14 = ₹899m ÷ (₹7.4b - ₹1.2b) (Based on the trailing twelve months to December 2020).

Therefore, Oriental Carbon & Chemicals has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 15% generated by the Chemicals industry.

View our latest analysis for Oriental Carbon & Chemicals

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 Oriental Carbon & Chemicals 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 Oriental Carbon & Chemicals Tell Us?

On the surface, the trend of ROCE at Oriental Carbon & Chemicals doesn't inspire confidence. Over the last five years, returns on capital have decreased to 14% from 18% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

We're a bit apprehensive about Oriental Carbon & Chemicals because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 136% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to continue researching Oriental Carbon & Chemicals, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Oriental Carbon & Chemicals 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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