Why You Should Care About Petronet LNG's (NSE:PETRONET) Strong Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Ergo, when we looked at the ROCE trends at Petronet LNG (NSE:PETRONET), we liked what we saw.

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. To calculate this metric for Petronet LNG, this is the formula:

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

0.24 = ₹45b ÷ (₹214b - ₹27b) (Based on the trailing twelve months to June 2022).

So, Petronet LNG has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.

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'd like to see what analysts are forecasting going forward, you should check out our free report for Petronet LNG.

What The Trend Of ROCE Can Tell Us

We'd be pretty happy with returns on capital like Petronet LNG. Over the past five years, ROCE has remained relatively flat at around 24% and the business has deployed 58% more capital into its operations. Now considering ROCE is an attractive 24%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

The Bottom Line On Petronet LNG's ROCE

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. In light of this, the stock has only gained 1.7% over the last five years for shareholders who have owned the stock in this period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

If you'd like to know about the risks facing Petronet LNG, we've discovered 2 warning signs that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.