Poddar Pigments' (NSE:PODDARMENT) Returns On Capital Not Reflecting Well On The Business

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Poddar Pigments (NSE:PODDARMENT) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Poddar Pigments:

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

0.13 = ₹319m ÷ (₹2.7b - ₹207m) (Based on the trailing twelve months to June 2021).

Therefore, Poddar Pigments has an ROCE of 13%. In absolute terms, that's a pretty standard return but compared to the Chemicals industry average it falls behind.

View our latest analysis for Poddar Pigments

Historical performance is a great place to start when researching a stock so above you can see the gauge for Poddar Pigments' ROCE against it's prior returns. If you're interested in investigating Poddar Pigments' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Poddar Pigments' ROCE Trending?

In terms of Poddar Pigments' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 19%, but since then they've fallen to 13%. 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 may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

To conclude, we've found that Poddar Pigments is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 61% over the last three years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know about the risks facing Poddar Pigments, we've discovered 3 warning signs that you should be aware of.

While Poddar Pigments isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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