Investors Will Want Gujarat Apollo Industries' (NSE:GUJAPOLLO) Growth In ROCE To Persist

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Gujarat Apollo Industries' (NSE:GUJAPOLLO) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Gujarat Apollo Industries is:

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

0.026 = ₹125m ÷ (₹5.3b - ₹401m) (Based on the trailing twelve months to December 2023).

Thus, Gujarat Apollo Industries has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 18%.

View our latest analysis for Gujarat Apollo Industries

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 Gujarat Apollo Industries has performed in the past in other metrics, you can view this free graph of Gujarat Apollo Industries' past earnings, revenue and cash flow.

What Can We Tell From Gujarat Apollo Industries' ROCE Trend?

We're delighted to see that Gujarat Apollo Industries is reaping rewards from its investments and has now broken into profitability. The company now earns 2.6% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

Our Take On Gujarat Apollo Industries' ROCE

To sum it up, Gujarat Apollo Industries is collecting higher returns from the same amount of capital, and that's impressive. And with a respectable 71% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. 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.

If you want to know some of the risks facing Gujarat Apollo Industries we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Gujarat Apollo Industries isn't earning the highest return, check out this free list of companies that are 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.