Returns On Capital - An Important Metric For Punjab Chemicals and Crop Protection (NSE:PUNJABCHEM)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. And in light of that, the trends we're seeing at Punjab Chemicals and Crop Protection's (NSE:PUNJABCHEM) look very promising so lets take a look.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Punjab Chemicals and Crop Protection:

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

0.40 = ₹730m ÷ (₹4.1b - ₹2.3b) (Based on the trailing twelve months to December 2020).

Thus, Punjab Chemicals and Crop Protection has an ROCE of 40%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.

Check out 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 want to delve into the historical earnings, revenue and cash flow of Punjab Chemicals and Crop Protection, check out these free graphs here.

How Are Returns Trending?

Punjab Chemicals and Crop Protection's ROCE growth is quite impressive. 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 164% 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. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a side note, Punjab Chemicals and Crop Protection's current liabilities are still rather high at 55% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, we're delighted to see that Punjab Chemicals and Crop Protection has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 601% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a separate note, we've found 2 warning signs for Punjab Chemicals and Crop Protection you'll probably want to know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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