Capital Allocation Trends At Thirumalai Chemicals (NSE:TIRUMALCHM) Aren't Ideal

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Thirumalai Chemicals (NSE:TIRUMALCHM) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Thirumalai Chemicals:

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

0.19 = ₹2.7b ÷ (₹20b - ₹6.2b) (Based on the trailing twelve months to December 2022).

So, Thirumalai Chemicals has an ROCE of 19%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Chemicals industry average of 17%.

See our latest analysis for Thirumalai Chemicals

Historical performance is a great place to start when researching a stock so above you can see the gauge for Thirumalai Chemicals' ROCE against it's prior returns. If you're interested in investigating Thirumalai Chemicals' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Thirumalai Chemicals' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 41% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Thirumalai Chemicals' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Thirumalai Chemicals. These trends are starting to be recognized by investors since the stock has delivered a 11% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One more thing to note, we've identified 2 warning signs with Thirumalai Chemicals and understanding these should be part of your investment process.

While Thirumalai Chemicals may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.