Sharda Cropchem (NSE:SHARDACROP) Will Be Hoping To Turn Its Returns On Capital Around

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at Sharda Cropchem (NSE:SHARDACROP), it didn't seem to tick all of these boxes.

What is 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. To calculate this metric for Sharda Cropchem, this is the formula:

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

0.20 = ₹3.5b ÷ (₹27b - ₹9.1b) (Based on the trailing twelve months to September 2021).

Thus, Sharda Cropchem has an ROCE of 20%. That's a relatively normal return on capital, and it's around the 17% generated by the Chemicals industry.

View our latest analysis for Sharda Cropchem

In the above chart we have measured Sharda Cropchem's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Sharda Cropchem here for free.

What Does the ROCE Trend For Sharda Cropchem Tell Us?

In terms of Sharda Cropchem's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 27% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Sharda Cropchem is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 19% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we've found 1 warning sign for Sharda Cropchem that we think you should be aware of.

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.