If we are to find multi-bagger potential, there are often underlying trends that can provide clues. Ideally, a business will display two trends; first growth return on capital employed (ROCE) and on the other hand, an increase amount capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Watch PhosAgro (MCX: PHOR) he has a high ROCE right now, but let’s see how the returns go.
Return on capital employed (ROCE): what is it?
If you’ve never worked with ROCE before, it measures the âreturnâ (profit before tax) that a business generates on capital employed in its business. Analysts use this formula to calculate it for PhosAgro:
Return on capital employed = Profit before interest and taxes (EBIT) Ã· (Total assets – Current liabilities)
0.29 = â½73b Ã· (â½335b – â½85b) (Based on the last twelve months up to March 2021).
So, PhosAgro has a ROCE of 29%. In absolute terms, this is a great return and it’s even better than the chemical industry average of 17%.
Check out our latest review for PhosAgro
In the graph above, we measured PhosAgro’s past ROCE against its past performance, but the future is arguably more important. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.
The ROCE trend
On the surface, the ROCE trend at PhosAgro does not inspire confidence. While it’s comforting that ROCE is high, it was 43% five years ago. Although, as income and the amount of assets used in the business have increased, this could suggest that the business is investing in growth and that the additional capital has resulted in a short-term reduction in ROCE. And if the capital increase generates additional returns, the company, and therefore the shareholders, will benefit in the long run.
Our opinion on PhosAgro’s ROCE
Even though returns on capital have declined in the short term, it looks promising to us that both income and capital employed have increased for PhosAgro. And long-term investors should be optimistic about the future, as the stock has returned a whopping 146% to shareholders over the past five years. So if these growth trends continue, we’d be optimistic about the stock’s future.
If you want to know some of the risks that PhosAgro faces, we have found 3 warning signs (1 shouldn’t be ignored!) Which you should be aware of before investing here.
If you want to look for other stocks that have generated high returns, check out this free list of stocks with strong balance sheets that also generate high returns on equity.
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