There Are Reasons To Feel Uneasy About Rama Phosphates' (NSE:RAMAPHO) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Rama Phosphates (NSE:RAMAPHO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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. The formula for this calculation on Rama Phosphates is:

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

0.048 = ₹178m ÷ (₹6.2b - ₹2.5b) (Based on the trailing twelve months to December 2024).

Therefore, Rama Phosphates has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 13%.

See our latest analysis for Rama Phosphates

Historical performance is a great place to start when researching a stock so above you can see the gauge for Rama Phosphates' ROCE against it's prior returns. If you're interested in investigating Rama Phosphates' past further, check out this free graph covering Rama Phosphates' past earnings, revenue and cash flow .

What Can We Tell From Rama Phosphates' ROCE Trend?

On the surface, the trend of ROCE at Rama Phosphates doesn't inspire confidence. To be more specific, ROCE has fallen from 16% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

While returns have fallen for Rama Phosphates in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 3.0% gain to shareholders who've held over the last year. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One final note, you should learn about the 3 warning signs we've spotted with Rama Phosphates (including 2 which are a bit unpleasant) .

While Rama Phosphates isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.