GPT Infraprojects (NSE:GPTINFRA) Might Become A Compounding Machine

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of GPT Infraprojects (NSE:GPTINFRA) looks attractive right now, so lets see what the trend of returns can tell us.

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 GPT Infraprojects is:

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

0.20 = ₹732m ÷ (₹7.3b - ₹3.7b) (Based on the trailing twelve months to December 2022).

So, 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 12%.

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.

SWOT Analysis for GPT Infraprojects

What Does the ROCE Trend For GPT Infraprojects Tell Us?

It's hard not to be impressed by GPT Infraprojects' returns on capital. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 51% in that time. Now considering ROCE is an attractive 20%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

On a side note, GPT Infraprojects has done well to reduce current liabilities to 51% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

Our Take On GPT Infraprojects' ROCE

In summary, we're delighted to see that GPT Infraprojects has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. Yet over the last five years the stock has declined 17%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

If you'd like to know more about GPT Infraprojects, we've spotted 3 warning signs, and 1 of them is a bit concerning.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.