Rashtriya Chemicals and Fertilizers (NSE:RCF) Hasn't Managed To Accelerate Its Returns

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Rashtriya Chemicals and Fertilizers (NSE:RCF) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for Rashtriya Chemicals and Fertilizers:

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

0.06 = ₹4.0b ÷ (₹100b - ₹34b) (Based on the trailing twelve months to December 2023).

So, Rashtriya Chemicals and Fertilizers has an ROCE of 6.0%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 14%.

See 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Rashtriya Chemicals and Fertilizers.

What Can We Tell From Rashtriya Chemicals and Fertilizers' ROCE Trend?

The returns on capital haven't changed much for Rashtriya Chemicals and Fertilizers in recent years. The company has employed 60% more capital in the last five years, and the returns on that capital have remained stable at 6.0%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Rashtriya Chemicals and Fertilizers has done well to reduce current liabilities to 34% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

Our Take On Rashtriya Chemicals and Fertilizers' ROCE

In conclusion, Rashtriya Chemicals and Fertilizers has been investing more capital into the business, but returns on that capital haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 182% gain to shareholders who have held 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.

One more thing to note, we've identified 3 warning signs with Rashtriya Chemicals and Fertilizers and understanding these should be part of your investment process.

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.