Chennai Petroleum (NSE:CHENNPETRO) Is Experiencing Growth In Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Chennai Petroleum (NSE:CHENNPETRO) looks quite promising in regards to its trends of return on capital.

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 Chennai Petroleum is:

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

0.086 = ₹7.4b ÷ (₹177b - ₹91b) (Based on the trailing twelve months to December 2024).

Therefore, Chennai Petroleum has an ROCE of 8.6%. On its own, that's a low figure but it's around the 11% average generated by the Oil and Gas industry.

Check out our latest analysis for Chennai Petroleum

Above you can see how the current ROCE for Chennai Petroleum compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Chennai Petroleum .

What Does the ROCE Trend For Chennai Petroleum Tell Us?

Chennai Petroleum has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 8.6% which is a sight for sore eyes. Not only that, but the company is utilizing 79% more capital than before, but that's to be expected from a company 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.

One more thing to note, Chennai Petroleum has decreased current liabilities to 51% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Chennai Petroleum has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

The Key Takeaway

Overall, Chennai Petroleum gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And a remarkable 433% 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.

On a final note, we found 3 warning signs for Chennai Petroleum (1 doesn't sit too well with us) you should be aware of.

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.