Is GP Petroleums (NSE:GULFPETRO) Likely To Turn Things Around?

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at GP Petroleums (NSE:GULFPETRO), it didn't seem to tick all of these boxes.

What is 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)

0.093 = ₹217m ÷ (₹3.4b - ₹1.1b) (Based on the trailing twelve months to December 2020).

So, GP Petroleums has an ROCE of 9.3%. In absolute terms, that's a low return, but it's much better than the Oil and Gas industry average of 5.0%.

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're interested in investigating GP Petroleums' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For GP Petroleums Tell Us?

On the surface, the trend of ROCE at GP Petroleums doesn't inspire confidence. To be more specific, ROCE has fallen from 15% over the last five years. However it looks like GP Petroleums might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

In summary, GP Petroleums is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 28% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

GP Petroleums does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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