There Are Reasons To Feel Uneasy About Sadhana Nitro Chem's (NSE:SADHNANIQ) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Sadhana Nitro Chem (NSE:SADHNANIQ), it didn't seem to tick all of these boxes.

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What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Sadhana Nitro Chem, this is the formula:

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

0.062 = ₹272m ÷ (₹6.4b - ₹2.0b) (Based on the trailing twelve months to March 2025).

Therefore, Sadhana Nitro Chem has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 12%.

Check out our latest analysis for Sadhana Nitro Chem

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're interested in investigating Sadhana Nitro Chem's past further, check out this free graph covering Sadhana Nitro Chem's past earnings, revenue and cash flow.

The Trend Of ROCE

The trend of ROCE doesn't look fantastic because it's fallen from 18% five years ago, while the business's capital employed increased by 237%. That being said, Sadhana Nitro Chem raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Sadhana Nitro Chem probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.

What We Can Learn From Sadhana Nitro Chem's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Sadhana Nitro Chem have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 63% from where it was year ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Sadhana Nitro Chem we've found 5 warning signs (3 can't be ignored!) that you should be aware of before investing 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.