GPT Infraprojects (NSE:GPTINFRA) Is Reinvesting At Lower Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Looking at GPT Infraprojects (NSE:GPTINFRA), it does have a high ROCE right now, but lets see how returns are trending.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on GPT Infraprojects is:

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

0.20 = ₹547m ÷ (₹6.9b - ₹4.2b) (Based on the trailing twelve months to December 2020).

Thus, GPT Infraprojects has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Construction industry average of 9.0%.

See our latest analysis for GPT Infraprojects

Historical performance is a great place to start when researching a stock so above you can see the gauge for GPT Infraprojects' ROCE against it's prior returns. If you'd like to look at how GPT Infraprojects 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 GPT Infraprojects Tell Us?

When we looked at the ROCE trend at GPT Infraprojects, we didn't gain much confidence. Historically returns on capital were even higher at 26%, but they have dropped over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Another thing to note, GPT Infraprojects has a high ratio of current liabilities to total assets of 61%. 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 GPT Infraprojects' ROCE

To conclude, we've found that GPT Infraprojects is reinvesting in the business, but returns have been falling. Since the stock has declined 44% over the last three years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

If you want to know some of the risks facing GPT Infraprojects we've found 5 warning signs (2 are concerning!) that you should be aware of before investing here.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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