The Return Trends At Rashtriya Chemicals and Fertilizers (NSE:RCF) Look Promising

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. With that in mind, we've noticed some promising trends at Rashtriya Chemicals and Fertilizers (NSE:RCF) so let's look a bit deeper.

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Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.077 = ₹4.5b ÷ (₹120b - ₹61b) (Based on the trailing twelve months to December 2024).

Therefore, Rashtriya Chemicals and Fertilizers has an ROCE of 7.7%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 13%.

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're interested in investigating Rashtriya Chemicals and Fertilizers' past further, check out this free graph covering Rashtriya Chemicals and Fertilizers' past earnings, revenue and cash flow .

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

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 7.7%. The amount of capital employed has increased too, by 45%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, Rashtriya Chemicals and Fertilizers' current liabilities are still rather high at 51% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Rashtriya Chemicals and Fertilizers' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Rashtriya Chemicals and Fertilizers has. Since the stock has returned a staggering 306% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Like most companies, Rashtriya Chemicals and Fertilizers does come with some risks, and we've found 1 warning sign that you should be aware of.

While Rashtriya Chemicals and Fertilizers may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.