If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Looking at PhosAgro (MCX:PHOR), it does have a high ROCE right now, but lets see how returns are trending.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for PhosAgro:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.29 = ₽73b ÷ (₽335b - ₽85b) (Based on the trailing twelve months to March 2021).
Thus, PhosAgro has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 17%.
In the above chart we have measured PhosAgro's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
On the surface, the trend of ROCE at PhosAgro doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 43%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Our Take On PhosAgro's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for PhosAgro. And long term investors must be optimistic going forward because the stock has returned a huge 146% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
If you want to know some of the risks facing PhosAgro we've found 3 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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