Sudarshan Chemical Industries (NSE:SUDARSCHEM) Might Be Having Difficulty Using Its Capital Effectively

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Sudarshan Chemical Industries (NSE:SUDARSCHEM) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Sudarshan Chemical Industries, this is the formula:

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

0.10 = ₹1.6b ÷ (₹24b - ₹9.3b) (Based on the trailing twelve months to December 2023).

Thus, Sudarshan Chemical Industries has an ROCE of 10%. In absolute terms, that's a pretty standard return but compared to the Chemicals industry average it falls behind.

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're interested, you can view the analysts predictions in our free analyst report for Sudarshan Chemical Industries .

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

When we looked at the ROCE trend at Sudarshan Chemical Industries, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 10% from 19% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Sudarshan Chemical Industries' ROCE

While returns have fallen for Sudarshan Chemical Industries in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 128% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know more about Sudarshan Chemical Industries, we've spotted 3 warning signs, and 1 of them shouldn't be ignored.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.