Be Wary Of Shree Pushkar Chemicals & Fertilisers (NSE:SHREEPUSHK) And Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. However, after investigating Shree Pushkar Chemicals & Fertilisers (NSE:SHREEPUSHK), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Shree Pushkar Chemicals & Fertilisers, this is the formula:

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

0.083 = ₹280m ÷ (₹4.1b - ₹767m) (Based on the trailing twelve months to December 2020).

So, Shree Pushkar Chemicals & Fertilisers has an ROCE of 8.3%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 15%.

View our latest analysis for Shree Pushkar Chemicals & Fertilisers

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shree Pushkar Chemicals & Fertilisers' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Shree Pushkar Chemicals & Fertilisers, check out these free graphs here.

What Can We Tell From Shree Pushkar Chemicals & Fertilisers' ROCE Trend?

When we looked at the ROCE trend at Shree Pushkar Chemicals & Fertilisers, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.3% from 18% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

What We Can Learn From Shree Pushkar Chemicals & Fertilisers' ROCE

In summary, we're somewhat concerned by Shree Pushkar Chemicals & Fertilisers' diminishing returns on increasing amounts of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 74% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Shree Pushkar Chemicals & Fertilisers does have some risks though, and we've spotted 2 warning signs for Shree Pushkar Chemicals & Fertilisers that you might be interested in.

While Shree Pushkar Chemicals & Fertilisers 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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