Investors Could Be Concerned With Navin Fluorine International's (NSE:NAVINFLUOR) Returns On Capital

Simply Wall St · 10/17 00:05

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at Navin Fluorine International (NSE:NAVINFLUOR), it didn't seem to tick all of these boxes.

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. To calculate this metric for Navin Fluorine International, this is the formula:

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

0.085 = ₹3.0b ÷ (₹44b - ₹8.6b) (Based on the trailing twelve months to June 2024).

So, Navin Fluorine International has an ROCE of 8.5%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 14%.

See our latest analysis for Navin Fluorine International

roce
NSEI:NAVINFLUOR Return on Capital Employed October 17th 2024

In the above chart we have measured Navin Fluorine International's 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 Navin Fluorine International for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Navin Fluorine International doesn't inspire confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 8.5%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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 Key Takeaway

Bringing it all together, while we're somewhat encouraged by Navin Fluorine International's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 366% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a separate note, we've found 3 warning signs for Navin Fluorine International you'll probably want to know about.

While Navin Fluorine International 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.