GMM Pfaudler (NSE:GMMPFAUDLR) Could Be Struggling To Allocate Capital

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating GMM Pfaudler (NSE:GMMPFAUDLR), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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 GMM Pfaudler:

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

0.18 = ₹3.6b ÷ (₹33b - ₹13b) (Based on the trailing twelve months to December 2023).

So, GMM Pfaudler has an ROCE of 18%. By itself that's a normal return on capital and it's in line with the industry's average returns of 18%.

Check out our latest analysis for GMM Pfaudler

Above you can see how the current ROCE for GMM Pfaudler compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for GMM Pfaudler .

What Does the ROCE Trend For GMM Pfaudler Tell Us?

On the surface, the trend of ROCE at GMM Pfaudler doesn't inspire confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 18%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On GMM Pfaudler's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for GMM Pfaudler. And long term investors must be optimistic going forward because the stock has returned a huge 234% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we've found 1 warning sign for GMM Pfaudler that we think you should be aware of.

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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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.