Here's What Sumitomo Chemical India's (NSE:SUMICHEM) Strong Returns On Capital Mean

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Sumitomo Chemical India's (NSE:SUMICHEM) trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Sumitomo Chemical India is:

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

0.26 = ₹4.7b ÷ (₹30b - ₹12b) (Based on the trailing twelve months to September 2021).

So, Sumitomo Chemical India has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 17% earned by companies in a similar industry.

Check out our latest analysis for Sumitomo Chemical India

Above you can see how the current ROCE for Sumitomo Chemical India compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Sumitomo Chemical India.

The Trend Of ROCE

Sumitomo Chemical India deserves to be commended in regards to it's returns. The company has consistently earned 26% for the last three years, and the capital employed within the business has risen 76% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Sumitomo Chemical India can keep this up, we'd be very optimistic about its future.

Our Take On Sumitomo Chemical India's ROCE

Sumitomo Chemical India has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And since the stock has risen strongly over the last year, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

One more thing, we've spotted 1 warning sign facing Sumitomo Chemical India that you might find interesting.

Sumitomo Chemical India 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.