Some Investors May Be Worried About Pondy Oxides And Chemicals' (NSE:POCL) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Pondy Oxides And Chemicals (NSE:POCL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Pondy Oxides And Chemicals, this is the formula:

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

0.16 = ₹571m ÷ (₹4.8b - ₹1.2b) (Based on the trailing twelve months to March 2024).

Therefore, Pondy Oxides And Chemicals has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 14% generated by the Metals and Mining industry.

Check out our latest analysis for Pondy Oxides And Chemicals

Historical performance is a great place to start when researching a stock so above you can see the gauge for Pondy Oxides And Chemicals' 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 Pondy Oxides And Chemicals.

The Trend Of ROCE

The trend of ROCE doesn't look fantastic because it's fallen from 44% five years ago, while the business's capital employed increased by 169%. That being said, Pondy Oxides And Chemicals raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Pondy Oxides And Chemicals probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, Pondy Oxides And Chemicals has done well to pay down its current liabilities to 25% of total assets. That could partly explain why the ROCE has dropped. 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

To conclude, we've found that Pondy Oxides And Chemicals is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 112% return in the last year, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a separate note, we've found 4 warning signs for Pondy Oxides And Chemicals you'll probably want to know about.

While Pondy Oxides And 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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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.

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