Investors Could Be Concerned With Gabriel India's (NSE:GABRIEL) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Gabriel India (NSE:GABRIEL), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Gabriel India is:

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

0.15 = ₹1.2b ÷ (₹12b - ₹4.5b) (Based on the trailing twelve months to December 2021).

Thus, Gabriel India has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 13% it's much better.

Check out our latest analysis for Gabriel India

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gabriel India's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Gabriel India, check out these free graphs here.

What Does the ROCE Trend For Gabriel India Tell Us?

When we looked at the ROCE trend at Gabriel India, we didn't gain much confidence. To be more specific, ROCE has fallen from 24% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Gabriel India. These trends are starting to be recognized by investors since the stock has delivered a 1.5% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One final note, you should learn about the 3 warning signs we've spotted with Gabriel India (including 1 which is potentially serious) .

While Gabriel India 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.