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Aug 22, 2023

Gulshan Polyols (NSE:GULPOLY) Will Want To Turn Around Its Return Trends

Stock Analysis 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)

Stock Analysis

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. 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 Gulshan Polyols (NSE:GULPOLY), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Gulshan Polyols:

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

0.067 = ₹480m ÷ (₹9.9b - ₹2.7b) (Based on the trailing twelve months to June 2023).

Therefore, Gulshan Polyols has an ROCE of 6.7%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 14%.

View our latest analysis for Gulshan Polyols

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gulshan Polyols' ROCE against it's prior returns. If you'd like to look at how Gulshan Polyols has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

In terms of Gulshan Polyols' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 11%, but since then they've fallen to 6.7%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Bringing it all together, while we're somewhat encouraged by Gulshan Polyols' reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 377% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to know some of the risks facing Gulshan Polyols we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Find out whether Gulshan Polyols is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.

Gulshan Polyols Limited engages in the mineral and grain processing, and ethanol distillery businesses in India and internationally.

Adequate balance sheet with questionable track record.