Rashtriya Chemicals and Fertilizers' (NSE:RCF) Returns On Capital Are Heading Higher

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Rashtriya Chemicals and Fertilizers' (NSE:RCF) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Rashtriya Chemicals and Fertilizers, this is the formula:

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

0.17 = ₹9.1b ÷ (₹105b - ₹50b) (Based on the trailing twelve months to March 2022).

So, Rashtriya Chemicals and Fertilizers has an ROCE of 17%. By itself that's a normal return on capital and it's in line with the industry's average returns of 17%.

See our latest analysis for Rashtriya Chemicals and Fertilizers

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

The Trend Of ROCE

We like the trends that we're seeing from Rashtriya Chemicals and Fertilizers. The data shows that returns on capital have increased substantially over the last five years to 17%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 49%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a separate but related note, it's important to know that Rashtriya Chemicals and Fertilizers has a current liabilities to total assets ratio of 48%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Rashtriya Chemicals and Fertilizers' ROCE

To sum it up, Rashtriya Chemicals and Fertilizers has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 16% to shareholders. So with that in mind, we think the stock deserves further research.

One more thing: We've identified 3 warning signs with Rashtriya Chemicals and Fertilizers (at least 2 which are a bit concerning) , and understanding them would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.