Paragon Fine And Speciality Chemical's (NSE:PARAGON) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Paragon Fine And Speciality Chemical (NSE:PARAGON), it didn't seem to tick all of these boxes.

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Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Paragon Fine And Speciality Chemical, this is the formula:

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

0.08 = ₹75m ÷ (₹1.0b - ₹108m) (Based on the trailing twelve months to March 2025).

So, Paragon Fine And Speciality Chemical has an ROCE of 8.0%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 12%.

See our latest analysis for Paragon Fine And Speciality Chemical

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

What Can We Tell From Paragon Fine And Speciality Chemical's ROCE Trend?

On the surface, the trend of ROCE at Paragon Fine And Speciality Chemical doesn't inspire confidence. Around four years ago the returns on capital were 33%, but since then they've fallen to 8.0%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Paragon Fine And Speciality Chemical has decreased its current liabilities to 10% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

To conclude, we've found that Paragon Fine And Speciality Chemical is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 61% 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 Paragon Fine And Speciality Chemical has the makings of a multi-bagger.

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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.