Chennai Petroleum (NSE:CHENNPETRO) Is Achieving High Returns On Its Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. And in light of that, the trends we're seeing at Chennai Petroleum's (NSE:CHENNPETRO) look very promising so lets take a look.

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 Chennai Petroleum:

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

0.35 = ₹39b ÷ (₹183b - ₹73b) (Based on the trailing twelve months to March 2024).

So, Chennai Petroleum has an ROCE of 35%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 15%.

View our latest analysis for Chennai Petroleum

In the above chart we have measured Chennai Petroleum's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Chennai Petroleum .

What Does the ROCE Trend For Chennai Petroleum Tell Us?

Investors would be pleased with what's happening at Chennai Petroleum. Over the last five years, returns on capital employed have risen substantially to 35%. Basically the business is earning more per dollar of capital invested and in addition to that, 109% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

One more thing to note, Chennai Petroleum has decreased current liabilities to 40% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

What We Can Learn From Chennai Petroleum's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Chennai Petroleum has. And a remarkable 356% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Chennai Petroleum can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 3 warning signs we've spotted with Chennai Petroleum (including 1 which is concerning) .

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.