Tatva Chintan Pharma Chem (NSE:TATVA) Will Be Hoping To Turn Its Returns On Capital Around

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. However, after briefly looking over the numbers, we don't think Tatva Chintan Pharma Chem (NSE:TATVA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. The formula for this calculation on Tatva Chintan Pharma Chem is:

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

0.021 = ₹158m ÷ (₹8.1b - ₹678m) (Based on the trailing twelve months to December 2024).

Therefore, Tatva Chintan Pharma Chem has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 13%.

See our latest analysis for Tatva Chintan Pharma Chem

Above you can see how the current ROCE for Tatva Chintan Pharma Chem 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 analyst report for Tatva Chintan Pharma Chem .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Tatva Chintan Pharma Chem doesn't inspire confidence. Around five years ago the returns on capital were 35%, but since then they've fallen to 2.1%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Tatva Chintan Pharma Chem has done well to pay down its current liabilities to 8.4% of total assets. That could partly explain why the ROCE has dropped. 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Tatva Chintan Pharma Chem's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Tatva Chintan Pharma Chem have fallen, meanwhile the business is employing more capital than it was five years ago. Unsurprisingly then, the stock has dived 72% over the last three years, so investors are recognizing these changes and don't like the company's prospects. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know about the risks facing Tatva Chintan Pharma Chem, we've discovered 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.