We Like CG Power and Industrial Solutions' (NSE:CGPOWER) Returns And Here's How They're Trending

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in CG Power and Industrial Solutions' (NSE:CGPOWER) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on CG Power and Industrial Solutions is:

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

0.50 = ₹8.1b ÷ (₹45b - ₹29b) (Based on the trailing twelve months to December 2022).

Therefore, CG Power and Industrial Solutions has an ROCE of 50%. In absolute terms that's a great return and it's even better than the Electrical industry average of 15%.

Check out our latest analysis for CG Power and Industrial Solutions

In the above chart we have measured CG Power and Industrial Solutions' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for CG Power and Industrial Solutions.

What The Trend Of ROCE Can Tell Us

You'd find it hard not to be impressed with the ROCE trend at CG Power and Industrial Solutions. We found that the returns on capital employed over the last five years have risen by 681%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, CG Power and Industrial Solutions appears to been achieving more with less, since the business is using 64% less capital to run its operation. CG Power and Industrial Solutions may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, CG Power and Industrial Solutions' current liabilities are still rather high at 64% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In a nutshell, we're pleased to see that CG Power and Industrial Solutions has been able to generate higher returns from less capital. And a remarkable 295% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we've found 3 warning signs for CG Power and Industrial Solutions that we think you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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.