Shivalik Rasayan's (NSE:SHIVALIK) Returns On Capital Not Reflecting Well On The Business

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. However, after briefly looking over the numbers, we don't think Shivalik Rasayan (NSE:SHIVALIK) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Shivalik Rasayan:

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

0.05 = ₹268m ÷ (₹6.9b - ₹1.6b) (Based on the trailing twelve months to March 2024).

Thus, Shivalik Rasayan has an ROCE of 5.0%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 13%.

View our latest analysis for Shivalik Rasayan

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'd like to look at how Shivalik Rasayan has performed in the past in other metrics, you can view this free graph of Shivalik Rasayan's past earnings, revenue and cash flow.

What Can We Tell From Shivalik Rasayan's ROCE Trend?

When we looked at the ROCE trend at Shivalik Rasayan, we didn't gain much confidence. Around five years ago the returns on capital were 9.0%, but since then they've fallen to 5.0%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Shivalik Rasayan's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Shivalik Rasayan is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 19% over the last year, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Shivalik Rasayan (of which 1 shouldn't be ignored!) that you should know about.

While Shivalik Rasayan 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com