Here's What's Concerning About Shree Pushkar Chemicals & Fertilisers' (NSE:SHREEPUSHK) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Shree Pushkar Chemicals & Fertilisers (NSE:SHREEPUSHK), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Shree Pushkar Chemicals & Fertilisers:

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

0.13 = ₹582m ÷ (₹6.3b - ₹1.7b) (Based on the trailing twelve months to September 2022).

Therefore, Shree Pushkar Chemicals & Fertilisers has an ROCE of 13%. In isolation, that's a pretty standard return but against the Chemicals industry average of 17%, it's not as good.

Check out 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 The Trend Of ROCE Can Tell Us

In terms of Shree Pushkar Chemicals & Fertilisers' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 13% from 23% five years ago. 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.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Shree Pushkar Chemicals & Fertilisers is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 40% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, Shree Pushkar Chemicals & Fertilisers does come with some risks, and we've found 4 warning signs that you should be aware of.

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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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.