There's Been No Shortage Of Growth Recently For Inox Wind Energy's (NSE:IWEL) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So on that note, Inox Wind Energy (NSE:IWEL) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Inox Wind Energy:

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

0.0063 = ₹215m ÷ (₹65b - ₹31b) (Based on the trailing twelve months to December 2023).

So, Inox Wind Energy has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 18%.

Check out our latest analysis for Inox Wind Energy

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'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 Does the ROCE Trend For Inox Wind Energy Tell Us?

Inox Wind Energy has recently broken into profitability so their prior investments seem to be paying off. About two years ago the company was generating losses but things have turned around because it's now earning 0.6% on its capital. In addition to that, Inox Wind Energy is employing 28% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a side note, Inox Wind Energy's current liabilities are still rather high at 48% of total assets. 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 Inox Wind Energy's ROCE

To the delight of most shareholders, Inox Wind Energy has now broken into profitability. And a remarkable 418% total return over the last year tells us that investors are expecting more good things to come in the future. 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.

One more thing: We've identified 2 warning signs with Inox Wind Energy (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.