S H Kelkar's (NSE:SHK) Returns Have Hit A Wall

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. That's why when we briefly looked at S H Kelkar's (NSE:SHK) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on S H Kelkar is:

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

0.13 = ₹2.0b ÷ (₹24b - ₹8.9b) (Based on the trailing twelve months to December 2023).

Therefore, S H Kelkar has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Chemicals industry average of 14%.

Check out our latest analysis for S H Kelkar

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 S H Kelkar has performed in the past in other metrics, you can view this free graph of S H Kelkar's past earnings, revenue and cash flow.

How Are Returns Trending?

While the current returns on capital are decent, they haven't changed much. The company has employed 54% more capital in the last five years, and the returns on that capital have remained stable at 13%. 13% is a pretty standard return, and it provides some comfort knowing that S H Kelkar has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Our Take On S H Kelkar's ROCE

The main thing to remember is that S H Kelkar has proven its ability to continually reinvest at respectable rates of return. And given the stock has only risen 25% over the last five years, we'd suspect the market is beginning to recognize these trends. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.

If you want to continue researching S H Kelkar, you might be interested to know about the 3 warning signs that our analysis has discovered.

While S H Kelkar 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.