Vinati Organics' (NSE:VINATIORGA) Returns On Capital Not Reflecting Well On The Business

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Vinati Organics (NSE:VINATIORGA) and its ROCE trend, we weren't exactly thrilled.

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. To calculate this metric for Vinati Organics, this is the formula:

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

0.15 = ₹4.0b ÷ (₹28b - ₹2.2b) (Based on the trailing twelve months to March 2024).

Thus, Vinati Organics has an ROCE of 15%. That's a relatively normal return on capital, and it's around the 14% generated by the Chemicals industry.

View our latest analysis for Vinati Organics

In the above chart we have measured Vinati Organics' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Vinati Organics for free.

The Trend Of ROCE

In terms of Vinati Organics' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 35%, but since then they've fallen to 15%. However it looks like Vinati Organics might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Vinati Organics' ROCE

To conclude, we've found that Vinati Organics is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 69% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to continue researching Vinati Organics, you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.