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

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing 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.

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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. Analysts use this formula to calculate it for Sudarshan Chemical Industries:

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

0.045 = ₹3.1b ÷ (₹97b - ₹29b) (Based on the trailing twelve months to June 2025).

Thus, Sudarshan Chemical Industries has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 12%.

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, you can check out the forecasts from the analysts covering Sudarshan Chemical Industries for free.

What Can We Tell From Sudarshan Chemical Industries' ROCE Trend?

We weren't thrilled with the trend because Sudarshan Chemical Industries' ROCE has reduced by 75% over the last five years, while the business employed 661% more capital. That being said, Sudarshan Chemical Industries raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Sudarshan Chemical Industries probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, Sudarshan Chemical Industries has decreased its current liabilities to 30% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

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 long term investors must be optimistic going forward because the stock has returned a huge 224% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Like most companies, Sudarshan Chemical Industries does come with some risks, and we've found 3 warning signs that you should be aware of.

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.