We Think Supreme Petrochem (NSE:SPLPETRO) Might Have The DNA Of A Multi-Bagger

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. And in light of that, the trends we're seeing at Supreme Petrochem's (NSE:SPLPETRO) look very promising so lets take a look.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Supreme Petrochem is:

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

0.22 = ₹4.8b ÷ (₹31b - ₹9.0b) (Based on the trailing twelve months to June 2024).

So, Supreme Petrochem has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 13%.

Check out our latest analysis for Supreme Petrochem

In the above chart we have measured Supreme Petrochem's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Supreme Petrochem .

How Are Returns Trending?

The trends we've noticed at Supreme Petrochem are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 22%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 209%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 29%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line

All in all, it's terrific to see that Supreme Petrochem is reaping the rewards from prior investments and is growing its capital base. And a remarkable 861% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Supreme Petrochem does have some risks though, and we've spotted 1 warning sign for Supreme Petrochem that you might be interested in.

Supreme Petrochem is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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.