Returns On Capital At Oriental Carbon & Chemicals (NSE:OCCL) Paint A Concerning Picture

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Oriental Carbon & Chemicals (NSE:OCCL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.12 = ₹882m ÷ (₹8.6b - ₹1.1b) (Based on the trailing twelve months to September 2023).

So, Oriental Carbon & Chemicals has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 14% generated by the Chemicals industry.

Check out our latest analysis for Oriental Carbon & Chemicals

Above you can see how the current ROCE for Oriental Carbon & Chemicals compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Oriental Carbon & Chemicals here for free.

What Can We Tell From Oriental Carbon & Chemicals' ROCE Trend?

In terms of Oriental Carbon & Chemicals' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 12% from 20% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

In summary, Oriental Carbon & Chemicals is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 28% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Oriental Carbon & Chemicals has the makings of a multi-bagger.

One more thing to note, we've identified 2 warning signs with Oriental Carbon & Chemicals and understanding these should be part of your investment process.

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.