The Returns On Capital At Godha Cabcon & Insulation (NSE:GODHA) Don't Inspire Confidence

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Godha Cabcon & Insulation (NSE:GODHA), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Godha Cabcon & Insulation is:

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

0.014 = ₹24m ÷ (₹2.8b - ₹1.1b) (Based on the trailing twelve months to September 2024).

So, Godha Cabcon & Insulation has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Electrical industry average of 16%.

See our latest analysis for Godha Cabcon & Insulation

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 Godha Cabcon & Insulation.

What Does the ROCE Trend For Godha Cabcon & Insulation Tell Us?

The trend of ROCE doesn't look fantastic because it's fallen from 12% five years ago, while the business's capital employed increased by 589%. That being said, Godha Cabcon & Insulation raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Godha Cabcon & Insulation probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

What We Can Learn From Godha Cabcon & Insulation's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Godha Cabcon & Insulation. And long term investors must be optimistic going forward because the stock has returned a huge 148% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know more about Godha Cabcon & Insulation, we've spotted 4 warning signs, and 3 of them make us uncomfortable.

While Godha Cabcon & Insulation 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.