GE Vernova T&D India (NSE:GVT&D) Is Very Good At Capital Allocation

There are a few key trends to look for if we want to identify the next multi-bagger. 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. 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 GE Vernova T&D India's (NSE:GVT&D) returns on capital, so let's have a look.

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. To calculate this metric for GE Vernova T&D India, this is the formula:

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

0.38 = ₹5.6b ÷ (₹40b - ₹26b) (Based on the trailing twelve months to September 2024).

Therefore, GE Vernova T&D India has an ROCE of 38%. In absolute terms that's a great return and it's even better than the Electrical industry average of 16%.

View our latest analysis for GE Vernova T&D India

In the above chart we have measured GE Vernova T&D India's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for GE Vernova T&D India .

What Does the ROCE Trend For GE Vernova T&D India Tell Us?

GE Vernova T&D India's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 205% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

On a separate but related note, it's important to know that GE Vernova T&D India has a current liabilities to total assets ratio of 63%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On GE Vernova T&D India's ROCE

To sum it up, GE Vernova T&D India is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 1,161% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

While GE Vernova T&D India looks impressive, no company is worth an infinite price. The intrinsic value infographic for GVT&D helps visualize whether it is currently trading for a fair price.

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.