Be Wary Of Premier Explosives (NSE:PREMEXPLN) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Premier Explosives (NSE:PREMEXPLN) 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)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Premier Explosives is:

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

0.0047 = ₹9.8m ÷ (₹2.9b - ₹876m) (Based on the trailing twelve months to March 2021).

So, Premier Explosives has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 15%.

View our latest analysis for Premier Explosives

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

So How Is Premier Explosives' ROCE Trending?

When we looked at the ROCE trend at Premier Explosives, we didn't gain much confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 0.5%. 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.

On a side note, Premier Explosives has done well to pay down its current liabilities to 30% 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. 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 Premier Explosives is reinvesting in the business, but returns have been falling. Since the stock has declined 50% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Premier Explosives (including 1 which is a bit concerning) .

While Premier Explosives 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. 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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