Here's What's Concerning About Sudarshan Chemical Industries' (NSE:SUDARSCHEM) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. However, after investigating Sudarshan Chemical Industries (NSE:SUDARSCHEM), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Sudarshan Chemical Industries is:

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

0.16 = ₹1.7b ÷ (₹17b - ₹6.9b) (Based on the trailing twelve months to December 2020).

So, Sudarshan Chemical Industries has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 15% generated by the Chemicals industry.

View our latest analysis for Sudarshan Chemical Industries

In the above chart we have measured Sudarshan Chemical Industries' 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 report for Sudarshan Chemical Industries.

What Does the ROCE Trend For Sudarshan Chemical Industries Tell Us?

In terms of Sudarshan Chemical Industries' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 21%, but since then they've fallen to 16%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Another thing to note, Sudarshan Chemical Industries has a high ratio of current liabilities to total assets of 40%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Sudarshan Chemical Industries is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 430% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

One more thing, we've spotted 3 warning signs facing Sudarshan Chemical Industries that you might find interesting.

While Sudarshan Chemical 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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