Here's What To Make Of Vishnu Chemicals' (NSE:VISHNU) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Vishnu Chemicals (NSE:VISHNU) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

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 Vishnu Chemicals is:

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

0.13 = ₹535m ÷ (₹7.5b - ₹3.4b) (Based on the trailing twelve months to June 2020).

So, Vishnu Chemicals has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 14% generated by the Chemicals industry.

View our latest analysis for Vishnu Chemicals

Historical performance is a great place to start when researching a stock so above you can see the gauge for Vishnu Chemicals' ROCE against it's prior returns. If you're interested in investigating Vishnu Chemicals' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at Vishnu Chemicals doesn't inspire confidence. To be more specific, ROCE has fallen from 25% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. 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, Vishnu Chemicals' current liabilities are still rather high at 46% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Vishnu Chemicals' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Vishnu Chemicals have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 62% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 3 warning signs for Vishnu Chemicals (1 shouldn't be ignored) you should be aware of.

While Vishnu Chemicals 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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