There's Been No Shortage Of Growth Recently For GMR Power And Urban Infra's (NSE:GMRP&UI) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at GMR Power And Urban Infra (NSE:GMRP&UI) and its trend of ROCE, we really liked what we saw.

What Is 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)

0.13 = ₹5.7b ÷ (₹118b - ₹75b) (Based on the trailing twelve months to March 2023).

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

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'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 Does the ROCE Trend For GMR Power And Urban Infra Tell Us?

We're pretty happy with how the ROCE has been trending at GMR Power And Urban Infra. The data shows that returns on capital have increased by 203% over the trailing two years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 38% less capital than it was two years ago. 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 side note, GMR Power And Urban Infra's current liabilities are still rather high at 64% of total assets. 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

From what we've seen above, GMR Power And Urban Infra has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 23% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we found 3 warning signs for GMR Power And Urban Infra (2 are a bit concerning) 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.

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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.