GP Petroleums (NSE:GULFPETRO) Has More To Do To Multiply In Value Going Forward

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at GP Petroleums' (NSE:GULFPETRO) ROCE trend, we were pretty happy with what we saw.

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 GP Petroleums is:

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

0.12 = ₹383m ÷ (₹3.6b - ₹473m) (Based on the trailing twelve months to June 2024).

Therefore, GP Petroleums has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 14% generated by the Oil and Gas industry.

View our latest analysis for GP Petroleums

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

So How Is GP Petroleums' ROCE Trending?

While the returns on capital are good, they haven't moved much. The company has consistently earned 12% for the last five years, and the capital employed within the business has risen 47% in that time. Since 12% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. 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.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 13% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From GP Petroleums' ROCE

In the end, GP Petroleums has proven its ability to adequately reinvest capital at good rates of return. And long term investors would be thrilled with the 111% return they've received over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One more thing to note, we've identified 2 warning signs with GP Petroleums and understanding them should be part of your investment process.

While GP Petroleums 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.