GMR Power And Urban Infra (NSE:GMRP&UI) Has Some Way To Go To Become A Multi-Bagger

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Having said that, from a first glance at GMR Power And Urban Infra (NSE:GMRP&UI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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. The formula for this calculation on GMR Power And Urban Infra is:

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

0.075 = ₹3.1b ÷ (₹121b - ₹79b) (Based on the trailing twelve months to December 2022).

Thus, GMR Power And Urban Infra has an ROCE of 7.5%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 12%.

See our latest analysis for GMR Power And Urban Infra

Historical performance is a great place to start when researching a stock so above you can see the gauge for GMR Power And Urban Infra's ROCE against it's prior returns. If you're interested in investigating GMR Power And Urban Infra's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is GMR Power And Urban Infra's ROCE Trending?

We're a bit concerned with the trends, because the business is applying 33% less capital than it was one year ago and returns on that capital have stayed flat. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

Another thing to note, GMR Power And Urban Infra has a high ratio of current liabilities to total assets of 66%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On GMR Power And Urban Infra's ROCE

Overall, we're not ecstatic to see GMR Power And Urban Infra reducing the amount of capital it employs in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 61% in the last year. Therefore based on the analysis done in this article, we don't think GMR Power And Urban Infra has the makings of a multi-bagger.

If you want to know some of the risks facing GMR Power And Urban Infra we've found 4 warning signs (2 are a bit unpleasant!) that you should be aware of before investing here.

While GMR Power And Urban Infra 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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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.