Southern Petrochemical Industries (NSE:SPIC) Is Very Good At Capital Allocation

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So when we looked at the ROCE trend of Southern Petrochemical Industries (NSE:SPIC) we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.28 = ₹3.1b ÷ (₹22b - ₹11b) (Based on the trailing twelve months to June 2023).

Thus, Southern Petrochemical Industries has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.

See our latest analysis for Southern Petrochemical Industries

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 want to delve into the historical earnings, revenue and cash flow of Southern Petrochemical Industries, check out these free graphs here.

What Can We Tell From Southern Petrochemical Industries' ROCE Trend?

Southern Petrochemical Industries is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 28%. The amount of capital employed has increased too, by 109%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Southern Petrochemical Industries has decreased current liabilities to 49% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

Our Take 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. And a remarkable 166% total return over the last five years tells us that investors are expecting more good things to come in the future. 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 about the risks facing Southern Petrochemical Industries, we've discovered 1 warning sign that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.