Here's What's Concerning About Thirumalai Chemicals' (NSE:TIRUMALCHM) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. 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.

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 Thirumalai Chemicals is:

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

0.047 = ₹696m ÷ (₹24b - ₹8.7b) (Based on the trailing twelve months to June 2023).

So, Thirumalai Chemicals has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 14%.

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'd like to look at how Thirumalai Chemicals has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Thirumalai Chemicals Tell Us?

In terms of Thirumalai Chemicals' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 38% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 37%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

In Conclusion...

To conclude, we've found that Thirumalai Chemicals is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 62% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Thirumalai Chemicals does have some risks though, and we've spotted 2 warning signs for Thirumalai Chemicals that you might be interested in.

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.