Returns On Capital At Premier Explosives (NSE:PREMEXPLN) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Premier Explosives (NSE:PREMEXPLN) 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)

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

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

0.055 = ₹114m ÷ (₹3.2b - ₹1.1b) (Based on the trailing twelve months to March 2022).

Therefore, Premier Explosives has an ROCE of 5.5%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 17%.

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're interested in investigating Premier Explosives' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Premier Explosives Tell Us?

In terms of Premier Explosives' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.5% from 17% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

While returns have fallen for Premier Explosives in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 29% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One final note, you should learn about the 3 warning signs we've spotted with Premier Explosives (including 1 which is a bit concerning) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.