Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Godfrey Phillips India's (NSE:GODFRYPHLP) ROCE trend, we were pretty happy with 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. 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 = ₹9.6b ÷ (₹65b - ₹14b) (Based on the trailing twelve months to December 2024).
Thus, Godfrey Phillips India has an ROCE of 19%. That's a relatively normal return on capital, and it's around the 17% generated by the Tobacco industry.
Check out our latest analysis for Godfrey Phillips India
Above you can see how the current ROCE for Godfrey Phillips India compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Godfrey Phillips India .
So How Is Godfrey Phillips India's ROCE Trending?
While the returns on capital are good, they haven't moved much. The company has consistently earned 19% for the last five years, and the capital employed within the business has risen 96% in that time. 19% is a pretty standard return, and it provides some comfort knowing that Godfrey Phillips India has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The Key Takeaway
To sum it up, Godfrey Phillips India has simply been reinvesting capital steadily, at those decent rates of return. And the stock has done incredibly well with a 640% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
If you'd like to know more about Godfrey Phillips India, we've spotted 2 warning signs, and 1 of them is significant.
While Godfrey Phillips India may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
Valuation is complex, but we're here to simplify it.
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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.