We Think Rashtriya Chemicals and Fertilizers (NSE:RCF) Might Have The DNA Of A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Rashtriya Chemicals and Fertilizers' (NSE:RCF) returns on capital, so let's have a look.

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)

0.23 = ₹14b ÷ (₹130b - ₹70b) (Based on the trailing twelve months to September 2022).

So, Rashtriya Chemicals and Fertilizers has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 17% earned by companies in a similar industry.

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 of past earnings, revenue and cash flow.

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

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 23%. Basically the business is earning more per dollar of capital invested and in addition to that, 56% more capital is being employed now too. 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, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 54% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On 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 investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 45% return over the last five years. In light of that, we think it's worth looking further into this stock because if Rashtriya Chemicals and Fertilizers can keep these trends up, it could have a bright future ahead.

If you'd like to know more about Rashtriya Chemicals and Fertilizers, we've spotted 4 warning signs, and 2 of them are potentially serious.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.