We Think Gujarat Ambuja Exports (NSE:GAEL) Might Have The DNA Of A Multi-Bagger

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. And in light of that, the trends we're seeing at Gujarat Ambuja Exports' (NSE:GAEL) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Gujarat Ambuja Exports is:

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

0.23 = ₹3.4b ÷ (₹18b - ₹2.9b) (Based on the trailing twelve months to December 2020).

So, Gujarat Ambuja Exports has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Food industry average of 12%.

See our latest analysis for Gujarat Ambuja Exports

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gujarat Ambuja Exports' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Gujarat Ambuja Exports, check out these free graphs here.

What Can We Tell From Gujarat Ambuja Exports' ROCE Trend?

The trends we've noticed at Gujarat Ambuja Exports are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 23%. The amount of capital employed has increased too, by 56%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 16%, which basically reduces it's funding from the likes of short-term creditors or suppliers. 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 Bottom Line

All in all, it's terrific to see that Gujarat Ambuja Exports is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 476% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

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. 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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