Why We Like The Returns At Sumitomo Chemical India (NSE:SUMICHEM)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Speaking of which, we noticed some great changes in Sumitomo Chemical India's (NSE:SUMICHEM) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Sumitomo Chemical India, this is the formula:

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

0.29 = ₹6.5b ÷ (₹35b - ₹12b) (Based on the trailing twelve months to September 2022).

Thus, Sumitomo Chemical India has an ROCE of 29%. 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Sumitomo Chemical India's ROCE Trending?

Sumitomo Chemical India is displaying some positive trends. The data shows that returns on capital have increased substantially over the last four years to 29%. Basically the business is earning more per dollar of capital invested and in addition to that, 119% more capital is being employed now too. So we're very much inspired by what we're seeing at Sumitomo Chemical India thanks to its ability to profitably reinvest capital.

What We Can Learn From Sumitomo Chemical India's ROCE

All in all, it's terrific to see that Sumitomo Chemical India is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 27% return over the last year. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing to note, we've identified 1 warning sign with Sumitomo Chemical India and understanding this should be part of your investment process.

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.

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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.