GMR Power And Urban Infra (NSE:GMRP&UI) Is Looking To Continue Growing Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, GMR Power And Urban Infra (NSE:GMRP&UI) looks quite promising in regards to its trends of return on capital.

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. 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)

0.17 = ₹17b ÷ (₹195b - ₹95b) (Based on the trailing twelve months to March 2024).

Thus, GMR Power And Urban Infra has an ROCE of 17%. That's a relatively normal return on capital, and it's around the 15% generated by the Construction industry.

View our latest analysis for GMR Power And Urban Infra

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 GMR Power And Urban Infra's past further, check out this free graph covering GMR Power And Urban Infra's past earnings, revenue and cash flow.

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

Investors would be pleased with what's happening at GMR Power And Urban Infra. Over the last three years, returns on capital employed have risen substantially to 17%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 46%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Another thing to note, GMR Power And Urban Infra has a high ratio of current liabilities to total assets of 49%. 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.

Our Take On GMR Power And Urban Infra's ROCE

All in all, it's terrific to see that GMR Power And Urban Infra is reaping the rewards from prior investments and is growing its capital base. And a remarkable 400% total return over the last year tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if GMR Power And Urban Infra can keep these trends up, it could have a bright future ahead.

If you'd like to know more about GMR Power And Urban Infra, we've spotted 3 warning signs, and 2 of them are a bit unpleasant.

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.