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Hindustan Petroleum (NSE:HINDPETRO) Is Reinvesting At Lower Rates Of Return
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Hindustan Petroleum (NSE:HINDPETRO), 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 that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Hindustan Petroleum:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = ₹59b ÷ (₹1.9t - ₹938b) (Based on the trailing twelve months to September 2024).
Thus, Hindustan Petroleum has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 12%.
View our latest analysis for Hindustan Petroleum
Above you can see how the current ROCE for Hindustan Petroleum compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Hindustan Petroleum .
How Are Returns Trending?
In terms of Hindustan Petroleum's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 6.3% from 11% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.
On a separate but related note, it's important to know that Hindustan Petroleum has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
Our Take On Hindustan Petroleum's ROCE
To conclude, we've found that Hindustan Petroleum is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 178% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
On a final note, we found 3 warning signs for Hindustan Petroleum (1 can't be ignored) 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.
Valuation is complex, but we're here to simplify it.
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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.
About NSEI:HINDPETRO
Hindustan Petroleum
Engages in the refining and marketing of petroleum products in India and internationally.
Average dividend payer with moderate growth potential.