Mangalore Refinery and Petrochemicals (NSE:MRPL) Is Very Good At Capital Allocation

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at the ROCE trend of Mangalore Refinery and Petrochemicals (NSE:MRPL) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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 Mangalore Refinery and Petrochemicals, this is the formula:

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

0.29 = ₹66b ÷ (₹351b - ₹121b) (Based on the trailing twelve months to March 2023).

Therefore, Mangalore Refinery and Petrochemicals has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.

See our latest analysis for Mangalore Refinery and Petrochemicals

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mangalore Refinery and Petrochemicals' ROCE against it's prior returns. If you're interested in investigating Mangalore Refinery and Petrochemicals' past further, check out this free graph of past earnings, revenue and cash flow.

SWOT Analysis for Mangalore Refinery and Petrochemicals

So How Is Mangalore Refinery and Petrochemicals' ROCE Trending?

The trends we've noticed at Mangalore Refinery and Petrochemicals are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 29%. Basically the business is earning more per dollar of capital invested and in addition to that, 50% more capital is being employed now too. So we're very much inspired by what we're seeing at Mangalore Refinery and Petrochemicals thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 34%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Mangalore Refinery and Petrochemicals has. And since the stock has fallen 28% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

Mangalore Refinery and Petrochemicals does have some risks though, and we've spotted 2 warning signs for Mangalore Refinery and Petrochemicals that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.