Should We Be Excited About The Trends Of Returns At Shree Pushkar Chemicals & Fertilisers (NSE:SHREEPUSHK)?

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at Shree Pushkar Chemicals & Fertilisers (NSE:SHREEPUSHK) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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 Shree Pushkar Chemicals & Fertilisers is:

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).

Thus, Shree Pushkar Chemicals & Fertilisers has an ROCE of 8.3%. In absolute terms, that's a low return and it also 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're interested in investigating Shree Pushkar Chemicals & Fertilisers' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Shree Pushkar Chemicals & Fertilisers Tell Us?

On the surface, the trend of ROCE at Shree Pushkar Chemicals & Fertilisers doesn't inspire confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 8.3%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On Shree Pushkar Chemicals & Fertilisers' ROCE

We're a bit apprehensive about Shree Pushkar Chemicals & Fertilisers because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Despite the concerning underlying trends, the stock has actually gained 25% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a separate note, we've found 2 warning signs for Shree Pushkar Chemicals & Fertilisers you'll probably want to know about.

While Shree Pushkar Chemicals & Fertilisers isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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