Can Tamilnadu Petroproducts (NSE:TNPETRO) Continue To Grow Its Returns On Capital?

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So on that note, Tamilnadu Petroproducts (NSE:TNPETRO) looks quite promising in regards to its trends of return on capital.

What is 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. To calculate this metric for Tamilnadu Petroproducts, this is the formula:

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

0.12 = ₹694m ÷ (₹7.6b - ₹2.0b) (Based on the trailing twelve months to September 2020).

Thus, Tamilnadu Petroproducts has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Chemicals industry average of 14%.

View our latest analysis for Tamilnadu Petroproducts

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tamilnadu Petroproducts' ROCE against it's prior returns. If you'd like to look at how Tamilnadu Petroproducts has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Tamilnadu Petroproducts' ROCE Trend?

The fact that Tamilnadu Petroproducts is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 12% on its capital. And unsurprisingly, like most companies trying to break into the black, Tamilnadu Petroproducts is utilizing 89% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 26%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

Our Take On Tamilnadu Petroproducts' ROCE

To the delight of most shareholders, Tamilnadu Petroproducts has now broken into profitability. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing: We've identified 3 warning signs with Tamilnadu Petroproducts (at least 1 which doesn't sit too well with us) , and understanding these would certainly be useful.

While Tamilnadu Petroproducts 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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