Shree Pushkar Chemicals & Fertilisers (NSE:SHREEPUSHK) Is Reinvesting At Lower Rates Of Return

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher 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. 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)

0.15 = ₹606m ÷ (₹5.5b - ₹1.5b) (Based on the trailing twelve months to December 2021).

So, Shree Pushkar Chemicals & Fertilisers has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 18% generated by the Chemicals industry.

Check out our latest analysis for Shree Pushkar Chemicals & Fertilisers

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 Shree Pushkar Chemicals & Fertilisers has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

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

We weren't thrilled with the trend because Shree Pushkar Chemicals & Fertilisers' ROCE has reduced by 34% over the last five years, while the business employed 118% more capital. That being said, Shree Pushkar Chemicals & Fertilisers raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Shree Pushkar Chemicals & Fertilisers might not have received a full period of earnings contribution from it.

The Bottom Line On Shree Pushkar Chemicals & Fertilisers' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shree Pushkar Chemicals & Fertilisers. Furthermore the stock has climbed 57% over the last five years, it would appear that investors are upbeat about the future. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Like most companies, Shree Pushkar Chemicals & Fertilisers does come with some risks, and we've found 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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

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.