Investors Shouldn't Overlook The Favourable Returns On Capital At Thirumalai Chemicals (NSE:TIRUMALCHM)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Ergo, when we looked at the ROCE trends at Thirumalai Chemicals (NSE:TIRUMALCHM), we liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Thirumalai Chemicals is:

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

0.27 = ₹2.9b ÷ (₹13b - ₹3.0b) (Based on the trailing twelve months to June 2021).

So, Thirumalai Chemicals has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 17%.

Check out 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.

What Does the ROCE Trend For Thirumalai Chemicals Tell Us?

Thirumalai Chemicals deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 27% and the business has deployed 287% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

On a side note, Thirumalai Chemicals has done well to reduce current liabilities to 22% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

Our Take On Thirumalai Chemicals' ROCE

In short, we'd argue Thirumalai Chemicals has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And long term investors would be thrilled with the 392% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you'd like to know more about Thirumalai Chemicals, we've spotted 3 warning signs, and 1 of them is concerning.

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.

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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