We Like Sumitomo Chemical India's (NSE:SUMICHEM) Returns And Here's How They're Trending

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of Sumitomo Chemical India (NSE:SUMICHEM) we really liked what we saw.

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 Sumitomo Chemical India is:

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

0.30 = ₹4.7b ÷ (₹27b - ₹11b) (Based on the trailing twelve months to June 2021).

Therefore, Sumitomo Chemical India has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 17%.

See 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, you can check out the forecasts from the analysts covering Sumitomo Chemical India here for free.

So How Is Sumitomo Chemical India's ROCE Trending?

Sumitomo Chemical India is displaying some positive trends. The numbers show that in the last three years, the returns generated on capital employed have grown considerably to 30%. 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 61%. So we're very much inspired by what we're seeing at Sumitomo Chemical India thanks to its ability to profitably reinvest capital.

Another thing to note, Sumitomo Chemical India 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Sumitomo Chemical India's ROCE

To sum it up, Sumitomo Chemical India has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 38% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.
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