Returns On Capital At Punjab Chemicals and Crop Protection (NSE:PUNJABCHEM) Paint A Concerning Picture

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Punjab Chemicals and Crop Protection (NSE:PUNJABCHEM) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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 Punjab Chemicals and Crop Protection:

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

0.15 = ₹627m ÷ (₹7.0b - ₹2.7b) (Based on the trailing twelve months to December 2024).

So, Punjab Chemicals and Crop Protection has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 13% generated by the Chemicals industry.

View our latest analysis for Punjab Chemicals and Crop Protection

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Punjab Chemicals and Crop Protection's past further, check out this free graph covering Punjab Chemicals and Crop Protection's past earnings, revenue and cash flow.

What Can We Tell From Punjab Chemicals and Crop Protection's ROCE Trend?

On the surface, the trend of ROCE at Punjab Chemicals and Crop Protection doesn't inspire confidence. To be more specific, ROCE has fallen from 34% over the last five years. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Punjab Chemicals and Crop Protection has done well to pay down its current liabilities to 39% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

To conclude, we've found that Punjab Chemicals and Crop Protection is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 58% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Like most companies, Punjab Chemicals and Crop Protection does come with some risks, and we've found 1 warning sign that you should be aware of.

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.