Southern Petrochemical Industries (NSE:SPIC) Is Experiencing Growth In Returns On Capital
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Southern Petrochemical Industries' (NSE:SPIC) returns on capital, so let's have a look.
What is 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 Southern Petrochemical Industries:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = ₹1.3b ÷ (₹17b - ₹9.3b) (Based on the trailing twelve months to March 2022).
Therefore, Southern Petrochemical Industries has an ROCE of 17%. By itself that's a normal return on capital and it's in line with the industry's average returns of 17%.
View 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're interested in investigating Southern Petrochemical Industries' past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
We like the trends that we're seeing from Southern Petrochemical Industries. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. The amount of capital employed has increased too, by 132%. So we're very much inspired by what we're seeing at Southern Petrochemical Industries thanks to its ability to profitably reinvest capital.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 55%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Southern Petrochemical Industries has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.
The Bottom Line On Southern Petrochemical Industries' ROCE
To sum it up, Southern Petrochemical Industries has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 85% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Southern Petrochemical Industries can keep these trends up, it could have a bright future ahead.
If you'd like to know more about Southern Petrochemical Industries, we've spotted 3 warning signs, and 1 of them is potentially serious.
While Southern Petrochemical Industries 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.
About NSEI:SPIC
Southern Petrochemical Industries
Engages in the manufacture and sale of fertilizers in India and internationally.
Excellent balance sheet second-rate dividend payer.