Investors Will Want Confidence Petroleum India's (NSE:CONFIPET) Growth In ROCE To Persist

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Confidence Petroleum India (NSE:CONFIPET) so let's look a bit deeper.

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. Analysts use this formula to calculate it for Confidence Petroleum India:

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

0.064 = ₹413m ÷ (₹7.0b - ₹482m) (Based on the trailing twelve months to December 2020).

So, Confidence Petroleum India has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 11%.

View our latest analysis for Confidence Petroleum India

Historical performance is a great place to start when researching a stock so above you can see the gauge for Confidence Petroleum India's ROCE against it's prior returns. If you'd like to look at how Confidence Petroleum India has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 6.4%. Basically the business is earning more per dollar of capital invested and in addition to that, 127% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Confidence Petroleum India has decreased current liabilities to 6.9% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

In Conclusion...

All in all, it's terrific to see that Confidence Petroleum India is reaping the rewards from prior investments and is growing its capital base. And a remarkable 143% total return over the last year 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 continue researching Confidence Petroleum India, you might be interested to know about the 1 warning sign that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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