The Trends At GP Petroleums (NSE:GULFPETRO) That You Should Know About

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating GP Petroleums (NSE:GULFPETRO), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for GP Petroleums, this is the formula:

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

0.083 = ₹194m ÷ (₹3.4b - ₹1.1b) (Based on the trailing twelve months to September 2020).

Thus, GP Petroleums has an ROCE of 8.3%. In absolute terms, that's a low return, but it's much better than the Oil and Gas industry average of 6.3%.

See 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 Can We Tell From GP Petroleums' ROCE Trend?

In terms of GP Petroleums' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.3% from 13% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

We're a bit apprehensive about GP Petroleums because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 24% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing, we've spotted 3 warning signs facing GP Petroleums that you might find interesting.

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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This article by Simply Wall St is general in nature. 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.
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