Power & Instrumental (Gujarat) (NSE:PIGL) May Have Issues Allocating Its Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Power & Instrumental (Gujarat) (NSE:PIGL), it didn't seem to tick all of these boxes.

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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. The formula for this calculation on Power & Instrumental (Gujarat) is:

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

0.15 = ₹169m ÷ (₹1.7b - ₹581m) (Based on the trailing twelve months to March 2025).

Therefore, Power & Instrumental (Gujarat) has an ROCE of 15%. By itself that's a normal return on capital and it's in line with the industry's average returns of 15%.

See our latest analysis for Power & Instrumental (Gujarat)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Power & Instrumental (Gujarat)'s ROCE against it's prior returns. If you'd like to look at how Power & Instrumental (Gujarat) has performed in the past in other metrics, you can view this free graph of Power & Instrumental (Gujarat)'s past earnings, revenue and cash flow.

So How Is Power & Instrumental (Gujarat)'s ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 33% five years ago, while the business's capital employed increased by 329%. Usually this isn't ideal, but given Power & Instrumental (Gujarat) conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Power & Instrumental (Gujarat)'s earnings and if they change as a result from the capital raise.

On a related note, Power & Instrumental (Gujarat) has decreased its current liabilities to 33% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Power & Instrumental (Gujarat) is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 1,049% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Power & Instrumental (Gujarat) does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

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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.