Returns On Capital At Rallis India (NSE:RALLIS) Paint A Concerning Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. 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 Rallis India (NSE:RALLIS) 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. Analysts use this formula to calculate it for Rallis India:

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

0.13 = ₹2.4b ÷ (₹29b - ₹11b) (Based on the trailing twelve months to December 2021).

Thus, Rallis India has an ROCE of 13%. In isolation, that's a pretty standard return but against the Chemicals industry average of 18%, it's not as good.

See our latest analysis for Rallis India

In the above chart we have measured Rallis India's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Rallis India.

What Can We Tell From Rallis India's ROCE Trend?

When we looked at the ROCE trend at Rallis India, we didn't gain much confidence. To be more specific, ROCE has fallen from 20% over the last five years. 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. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Rallis India's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Rallis India. These trends are starting to be recognized by investors since the stock has delivered a 8.4% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Rallis India does have some risks though, and we've spotted 1 warning sign for Rallis India that you might be interested in.

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.