Stock Analysis

Slowing Rates Of Return At Bharat Petroleum (NSE:BPCL) Leave Little Room For Excitement

NSEI:BPCL
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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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Bharat Petroleum (NSE:BPCL) looks decent, right now, so lets see what the trend of returns can tell us.

Return On Capital Employed (ROCE): What is it?

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 Bharat Petroleum:

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

0.16 = ₹160b ÷ (₹1.9t - ₹842b) (Based on the trailing twelve months to September 2021).

Thus, Bharat Petroleum has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 9.3% generated by the Oil and Gas industry.

View our latest analysis for Bharat Petroleum

roce
NSEI:BPCL Return on Capital Employed January 23rd 2022

In the above chart we have measured Bharat Petroleum'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 report on analyst forecasts for the company.

The Trend Of ROCE

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 16% for the last five years, and the capital employed within the business has risen 75% in that time. 16% is a pretty standard return, and it provides some comfort knowing that Bharat Petroleum has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, Bharat Petroleum's current liabilities are still rather high at 45% of total assets. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

The main thing to remember is that Bharat Petroleum has proven its ability to continually reinvest at respectable rates of return. In light of this, the stock has only gained 21% over the last five years for shareholders who have owned the stock in this period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

One more thing to note, we've identified 3 warning signs with Bharat Petroleum and understanding them should be part of your investment process.

While Bharat Petroleum isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Valuation is complex, but we're helping make it simple.

Find out whether Bharat Petroleum is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.