There Are Reasons To Feel Uneasy About Oriental Carbon & Chemicals' (NSE:OCCL) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Oriental Carbon & Chemicals (NSE:OCCL) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. To calculate this metric for Oriental Carbon & Chemicals, this is the formula:

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

0.098 = ₹697m ÷ (₹8.7b - ₹1.6b) (Based on the trailing twelve months to June 2022).

Therefore, Oriental Carbon & Chemicals has an ROCE of 9.8%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 17%.

See our latest analysis for Oriental Carbon & Chemicals

Historical performance is a great place to start when researching a stock so above you can see the gauge for Oriental Carbon & Chemicals' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Oriental Carbon & Chemicals, check out these free graphs here.

How Are Returns Trending?

On the surface, the trend of ROCE at Oriental Carbon & Chemicals doesn't inspire confidence. To be more specific, ROCE has fallen from 18% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Oriental Carbon & Chemicals' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Oriental Carbon & Chemicals. These growth trends haven't led to growth returns though, since the stock has fallen 18% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know more about Oriental Carbon & Chemicals, we've spotted 3 warning signs, and 1 of them doesn't sit too well with us.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.