Genus Power Infrastructures' (NSE:GENUSPOWER) Returns On Capital Not Reflecting Well On The Business

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after briefly looking over the numbers, we don't think Genus Power Infrastructures (NSE:GENUSPOWER) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Genus Power Infrastructures, this is the formula:

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

0.072 = ₹875m ÷ (₹19b - ₹6.8b) (Based on the trailing twelve months to December 2023).

So, Genus Power Infrastructures has an ROCE of 7.2%. Ultimately, that's a low return and it under-performs the Electronic industry average of 12%.

View our latest analysis for Genus Power Infrastructures

In the above chart we have measured Genus Power Infrastructures' 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 Genus Power Infrastructures for free.

What Can We Tell From Genus Power Infrastructures' ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 11% five years ago, while the business's capital employed increased by 49%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Genus Power Infrastructures' earnings and if they change as a result from the capital raise.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Genus Power Infrastructures is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 887% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Genus Power Infrastructures does have some risks though, and we've spotted 3 warning signs for Genus Power Infrastructures that you might be interested in.

While Genus Power Infrastructures isn't earning the highest return, check out this free list of companies that are 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.