Here's What Petronet LNG's (NSE:PETRONET) Strong Returns On Capital Mean

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ergo, when we looked at the ROCE trends at Petronet LNG (NSE:PETRONET), we liked what we saw.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Petronet LNG is:

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

0.23 = ₹44b ÷ (₹235b - ₹41b) (Based on the trailing twelve months to December 2022).

Therefore, Petronet LNG has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 12%.

Check out our latest analysis for Petronet LNG

In the above chart we have measured Petronet LNG's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

It's hard not to be impressed by Petronet LNG's returns on capital. The company has consistently earned 23% for the last five years, and the capital employed within the business has risen 57% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

The Bottom Line On Petronet LNG's ROCE

Petronet LNG has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. In light of this, the stock has only gained 23% over the last five years for shareholders who have owned the stock in this period. So to determine if Petronet LNG is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

If you want to continue researching Petronet LNG, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.