The Return Trends At GMR Power And Urban Infra (NSE:GMRP&UI) Look Promising

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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.

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

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 GMR Power And Urban Infra:

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

0.12 = ₹4.2b ÷ (₹109b - ₹74b) (Based on the trailing twelve months to September 2023).

Thus, GMR Power And Urban Infra has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 13% generated by the Construction industry.

Check out 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'd like to look at how GMR Power And Urban Infra has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

You'd find it hard not to be impressed with the ROCE trend at GMR Power And Urban Infra. The figures show that over the last two years, returns on capital have grown by 104%. The company is now earning ₹0.1 per dollar of capital employed. In regards to capital employed, GMR Power And Urban Infra appears to been achieving more with less, since the business is using 43% less capital to run its operation. GMR Power And Urban Infra may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a separate but related note, it's important to know that GMR Power And Urban Infra has a current liabilities to total assets ratio of 68%, which we'd consider pretty high. 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 On GMR Power And Urban Infra's ROCE

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 111% total return over the last year tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a separate note, we've found 4 warning signs for GMR Power And Urban Infra you'll probably want to know about.

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.