Inox Wind Energy (NSE:IWEL) Is Experiencing Growth In Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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 Inox Wind Energy's (NSE:IWEL) returns on capital, so let's have a look.

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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. To calculate this metric for Inox Wind Energy, this is the formula:

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

0.081 = ₹4.4b ÷ (₹84b - ₹30b) (Based on the trailing twelve months to December 2024).

So, Inox Wind Energy has an ROCE of 8.1%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 19%.

View our latest analysis for Inox Wind Energy

Historical performance is a great place to start when researching a stock so above you can see the gauge for Inox Wind Energy's ROCE against it's prior returns. If you're interested in investigating Inox Wind Energy's past further, check out this free graph covering Inox Wind Energy's past earnings, revenue and cash flow .

What The Trend Of ROCE Can Tell Us

The fact that Inox Wind Energy is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making three years ago but is is now generating 8.1% on its capital. Not only that, but the company is utilizing 104% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Inox Wind Energy has decreased current liabilities to 36% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On Inox Wind Energy's ROCE

Long story short, we're delighted to see that Inox Wind Energy's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 1,216% to shareholders over the last three years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

While Inox Wind Energy looks impressive, no company is worth an infinite price. The intrinsic value infographic for IWEL helps visualize whether it is currently trading for a fair price.

While Inox Wind Energy 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.