We Think CG Power and Industrial Solutions (NSE:CGPOWER) Might Have The DNA Of A Multi-Bagger

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at CG Power and Industrial Solutions' (NSE:CGPOWER) look very promising so lets take a look.

What Is 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)

0.45 = ₹10b ÷ (₹50b - ₹28b) (Based on the trailing twelve months to September 2023).

So, CG Power and Industrial Solutions has an ROCE of 45%. In absolute terms that's a great return and it's even better than the Electrical industry average of 17%.

See 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 Can We Tell From CG Power and Industrial Solutions' ROCE Trend?

You'd find it hard not to be impressed with the ROCE trend at CG Power and Industrial Solutions. The figures show that over the last five years, returns on capital have grown by 267%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 30% less than it was five years ago, which can be indicative of a business that's improving its efficiency. 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 separate but related note, it's important to know that CG Power and Industrial Solutions has a current liabilities to total assets ratio of 55%, which we'd consider pretty high. 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.

The Bottom Line On CG Power and Industrial Solutions' ROCE

From what we've seen above, CG Power and Industrial Solutions has managed to increase it's returns on capital all the while reducing it's capital base. And a remarkable 975% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

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

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.