Rashtriya Chemicals and Fertilizers (NSE:RCF) Will Want To Turn Around Its Return Trends

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Rashtriya Chemicals and Fertilizers (NSE:RCF) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Rashtriya Chemicals and Fertilizers is:

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

0.057 = ₹3.4b ÷ (₹120b - ₹61b) (Based on the trailing twelve months to September 2024).

So, Rashtriya Chemicals and Fertilizers has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 13%.

Check out 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 , check out these free graphs detailing revenue and cash flow performance of Rashtriya Chemicals and Fertilizers.

What Does the ROCE Trend For Rashtriya Chemicals and Fertilizers Tell Us?

When we looked at the ROCE trend at Rashtriya Chemicals and Fertilizers, we didn't gain much confidence. Around five years ago the returns on capital were 7.6%, but since then they've fallen to 5.7%. However it looks like Rashtriya Chemicals and Fertilizers might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Another thing to note, Rashtriya Chemicals and Fertilizers has a high ratio of current liabilities to total assets of 51%. 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.

The Bottom Line

In summary, Rashtriya Chemicals and Fertilizers is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 280% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we've found 2 warning signs for Rashtriya Chemicals and Fertilizers that we think you should be aware of.

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.

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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.