What Do The Returns On Capital At Thirumalai Chemicals (NSE:TIRUMALCHM) Tell Us?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Thirumalai Chemicals (NSE:TIRUMALCHM) 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. Analysts use this formula to calculate it for Thirumalai Chemicals:

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

0.013 = ₹122m ÷ (₹12b - ₹2.8b) (Based on the trailing twelve months to September 2020).

So, Thirumalai Chemicals has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 14%.

View 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 15% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Thirumalai Chemicals has done well to pay down its current liabilities to 23% of total assets. So we could link some of this to the decrease in ROCE. 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.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Thirumalai Chemicals have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 400% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing, we've spotted 1 warning sign facing Thirumalai Chemicals that you might find interesting.

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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