Should You Be Impressed By Southern Petrochemical Industries' (NSE:SPIC) Returns on Capital?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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 briefly looking over the numbers, we don't think Southern Petrochemical Industries (NSE:SPIC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Southern Petrochemical Industries, this is the formula:

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

0.13 = ₹661m ÷ (₹20b - ₹15b) (Based on the trailing twelve months to September 2020).

Thus, Southern Petrochemical Industries has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Chemicals industry average of 15%.

See our latest analysis for Southern Petrochemical Industries

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

How Are Returns Trending?

On the surface, the trend of ROCE at Southern Petrochemical Industries doesn't inspire confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 13%. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

On a side note, Southern Petrochemical Industries' current liabilities are still rather high at 75% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, we're somewhat concerned by Southern Petrochemical Industries' diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 29% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

On a final note, we've found 2 warning signs for Southern Petrochemical Industries that we think 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.

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