There Are Reasons To Feel Uneasy About Savita Oil Technologies' (NSE:SOTL) 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. 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. 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 Savita Oil Technologies (NSE:SOTL), we don't think it's current trends fit the mold of a multi-bagger.

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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 Savita Oil Technologies is:

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

0.075 = ₹1.2b ÷ (₹23b - ₹6.7b) (Based on the trailing twelve months to December 2024).

Therefore, Savita Oil Technologies has an ROCE of 7.5%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 13%.

See our latest analysis for Savita Oil Technologies

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 Savita Oil Technologies has performed in the past in other metrics, you can view this free graph of Savita Oil Technologies' past earnings, revenue and cash flow.

What Does the ROCE Trend For Savita Oil Technologies Tell Us?

In terms of Savita Oil Technologies' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 20%, but since then they've fallen to 7.5%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Savita Oil Technologies' ROCE

Bringing it all together, while we're somewhat encouraged by Savita Oil Technologies' reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 244% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, Savita Oil Technologies does come with some risks, and we've found 3 warning signs that you should be aware of.

While Savita Oil Technologies 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.