Investors Shouldn't Overlook Punjab Chemicals and Crop Protection's (NSE:PUNJABCHEM) Impressive Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Punjab Chemicals and Crop Protection's (NSE:PUNJABCHEM) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Punjab Chemicals and Crop Protection, this is the formula:

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

0.34 = ₹806m ÷ (₹4.5b - ₹2.1b) (Based on the trailing twelve months to March 2021).

Thus, Punjab Chemicals and Crop Protection has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 15%.

View our latest analysis for Punjab Chemicals and Crop Protection

Historical performance is a great place to start when researching a stock so above you can see the gauge for Punjab Chemicals and Crop Protection's ROCE against it's prior returns. If you'd like to look at how Punjab Chemicals and Crop Protection has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Punjab Chemicals and Crop Protection has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 210% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

On a separate but related note, it's important to know that Punjab Chemicals and Crop Protection has a current liabilities to total assets ratio of 47%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

To sum it up, Punjab Chemicals and Crop Protection is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 599% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Punjab Chemicals and Crop Protection can keep these trends up, it could have a bright future ahead.

If you want to continue researching Punjab Chemicals and Crop Protection, you might be interested to know about the 2 warning signs that our analysis has discovered.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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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