Why The 30% Return On Capital At Vishnu Chemicals (NSE:VISHNU) Should Have Your Attention

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at Vishnu Chemicals' (NSE:VISHNU) look very promising so lets take a look.

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 Vishnu Chemicals, this is the formula:

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

0.30 = ₹2.0b ÷ (₹11b - ₹3.7b) (Based on the trailing twelve months to March 2023).

Therefore, Vishnu Chemicals has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 16%.

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'd like to look at how Vishnu Chemicals 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 Vishnu Chemicals' ROCE Trend?

We like the trends that we're seeing from Vishnu Chemicals. Over the last five years, returns on capital employed have risen substantially to 30%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 91%. So we're very much inspired by what we're seeing at Vishnu Chemicals thanks to its ability to profitably reinvest capital.

One more thing to note, Vishnu Chemicals has decreased current liabilities to 35% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Vishnu Chemicals has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Vishnu Chemicals' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Vishnu Chemicals has. Since the stock has returned a staggering 544% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Vishnu Chemicals can keep these trends up, it could have a bright future ahead.

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

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.