Godfrey Phillips India (NSE:GODFRYPHLP) Is Experiencing Growth In 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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Godfrey Phillips India (NSE:GODFRYPHLP) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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 Godfrey Phillips India, this is the formula:

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

0.19 = ₹6.7b ÷ (₹45b - ₹10b) (Based on the trailing twelve months to December 2022).

Therefore, Godfrey Phillips India has an ROCE of 19%. That's a relatively normal return on capital, and it's around the 20% generated by the Tobacco industry.

See our latest analysis for Godfrey Phillips India

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

What Does the ROCE Trend For Godfrey Phillips India Tell Us?

The trends we've noticed at Godfrey Phillips India are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 19%. Basically the business is earning more per dollar of capital invested and in addition to that, 90% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Godfrey Phillips India's ROCE

In summary, it's great to see that Godfrey Phillips India can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 110% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

While Godfrey Phillips India looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether GODFRYPHLP is currently trading for a fair price.

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.

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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.