Returns Are Gaining Momentum At GE Power India (NSE:GEPIL)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in GE Power India's (NSE:GEPIL) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for GE Power India, this is the formula:

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

0.071 = ₹794m ÷ (₹37b - ₹26b) (Based on the trailing twelve months to December 2020).

So, GE Power India has an ROCE of 7.1%. On its own, that's a low figure but it's around the 8.4% average generated by the Construction industry.

View our latest analysis for GE Power India

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're interested in investigating GE Power India's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For GE Power India Tell Us?

We're delighted to see that GE Power India is reaping rewards from its investments and has now broken into profitability. The company now earns 7.1% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a side note, GE Power India's current liabilities are still rather high at 70% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In summary, we're delighted to see that GE Power India has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 55% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we've found 3 warning signs for GE Power India that we think you should be aware of.

While GE Power India may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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