Slowing Rates Of Return At Gujarat Mineral Development (NSE:GMDCLTD) Leave Little Room For Excitement

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 Gujarat Mineral Development (NSE:GMDCLTD), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Gujarat Mineral Development, this is the formula:

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

0.075 = ₹5.1b ÷ (₹74b - ₹5.5b) (Based on the trailing twelve months to June 2024).

Therefore, Gujarat Mineral Development has an ROCE of 7.5%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 14%.

View our latest analysis for Gujarat Mineral Development

Above you can see how the current ROCE for Gujarat Mineral Development compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Gujarat Mineral Development for free.

What Can We Tell From Gujarat Mineral Development's ROCE Trend?

The returns on capital haven't changed much for Gujarat Mineral Development in recent years. The company has employed 37% more capital in the last five years, and the returns on that capital have remained stable at 7.5%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From Gujarat Mineral Development's ROCE

As we've seen above, Gujarat Mineral Development's returns on capital haven't increased but it is reinvesting in the business. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 591% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know about the risks facing Gujarat Mineral Development, we've discovered 2 warning signs that you should be aware of.

While Gujarat Mineral Development may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.