Here's What's Concerning About Indus Gas' (LON:INDI) Returns On Capital

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Indus Gas (LON:INDI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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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 Indus Gas:

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

0.011 = US$15m ÷ (US$1.4b - US$37m) (Based on the trailing twelve months to September 2024).

Thus, Indus Gas has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 8.4%.

Check out our latest analysis for Indus Gas

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Indus Gas.

How Are Returns Trending?

On the surface, the trend of ROCE at Indus Gas doesn't inspire confidence. Around five years ago the returns on capital were 5.8%, but since then they've fallen to 1.1%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Indus Gas' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Indus Gas have fallen, meanwhile the business is employing more capital than it was five years ago. Unsurprisingly then, the stock has dived 94% over the last five years, so investors are recognizing these changes and don't like the company's prospects. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Indus Gas does come with some risks though, we found 5 warning signs in our investment analysis, and 3 of those can't be ignored...

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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.