Here's What's Concerning About GE T&D India's (NSE:GET&D) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think GE T&D India (NSE:GET&D) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for GE T&D India, this is the formula:

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

0.043 = ₹565m ÷ (₹40b - ₹26b) (Based on the trailing twelve months to December 2021).

Thus, GE T&D India has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 13%.

View our latest analysis for GE T&D India

Historical performance is a great place to start when researching a stock so above you can see the gauge for GE T&D India's ROCE against it's prior returns. If you're interested in investigating GE T&D India's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From GE T&D India's ROCE Trend?

In terms of GE T&D India's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.3% from 6.9% five years ago. However it looks like GE T&D India might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, GE T&D India has done well to pay down its current liabilities to 67% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Key Takeaway

To conclude, we've found that GE T&D India is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 63% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think GE T&D India has the makings of a multi-bagger.

GE T&D India does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.