GMR Power And Urban Infra (NSE:GMRP&UI) Might Have The Makings Of A Multi-Bagger

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at GMR Power And Urban Infra (NSE:GMRP&UI) so let's look a bit deeper.

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. 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)

0.14 = ₹5.0b ÷ (₹109b - ₹74b) (Based on the trailing twelve months to December 2023).

So, GMR Power And Urban Infra 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 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of GMR Power And Urban Infra.

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

You'd find it hard not to be impressed with the ROCE trend at GMR Power And Urban Infra. We found that the returns on capital employed over the last two years have risen by 127%. The company is now earning ₹0.1 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 43% less than it was two years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a side note, GMR Power And Urban Infra's current liabilities are still rather high at 68% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

In the end, GMR Power And Urban Infra has proven it's capital allocation skills are good with those higher returns from less amount of capital. And a remarkable 193% total return over the last year tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

Like most companies, GMR Power And Urban Infra does come with some risks, and we've found 2 warning signs that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.