Investors Could Be Concerned With GMM Pfaudler's (NSE:GMMPFAUDLR) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at GMM Pfaudler (NSE:GMMPFAUDLR), it didn't seem to tick all of these boxes.

Understanding 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. Analysts use this formula to calculate it for GMM Pfaudler:

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

0.14 = ₹2.2b ÷ (₹27b - ₹11b) (Based on the trailing twelve months to June 2022).

So, GMM Pfaudler has an ROCE of 14%. That's a pretty standard return and it's in line with the industry average of 14%.

View our latest analysis for GMM Pfaudler

In the above chart we have measured GMM Pfaudler's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

In terms of GMM Pfaudler's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 21% over the last five years. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line 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 244% to shareholders in the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to continue researching GMM Pfaudler, you might be interested to know about the 2 warning signs 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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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.