Investors Will Want Rashtriya Chemicals and Fertilizers' (NSE:RCF) Growth In ROCE To Persist

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Rashtriya Chemicals and Fertilizers (NSE:RCF) looks quite promising in regards to its trends of return on capital.

What Is 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. The formula for this calculation on Rashtriya Chemicals and Fertilizers is:

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

0.099 = ₹6.5b ÷ (₹100b - ₹34b) (Based on the trailing twelve months to September 2023).

So, Rashtriya Chemicals and Fertilizers has an ROCE of 9.9%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 14%.

View our latest analysis for Rashtriya Chemicals and Fertilizers

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

The Trend Of ROCE

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 9.9%. Basically the business is earning more per dollar of capital invested and in addition to that, 60% more capital is being employed now too. So we're very much inspired by what we're seeing at Rashtriya Chemicals and Fertilizers thanks to its ability to profitably reinvest capital.

One more thing to note, Rashtriya Chemicals and Fertilizers has decreased current liabilities to 34% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Rashtriya Chemicals and Fertilizers has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Rashtriya Chemicals and Fertilizers' ROCE

In summary, it's great to see that Rashtriya Chemicals and Fertilizers can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing to note, we've identified 2 warning signs with Rashtriya Chemicals and Fertilizers and understanding them should be part of your investment process.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.