Gallantt Ispat (NSE:GALLANTT) Might Be Having Difficulty Using Its Capital Effectively

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. However, after briefly looking over the numbers, we don't think Gallantt Ispat (NSE:GALLANTT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Gallantt Ispat, this is the formula:

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

0.11 = ₹2.6b ÷ (₹31b - ₹5.8b) (Based on the trailing twelve months to September 2023).

Therefore, Gallantt Ispat has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the Metals and Mining industry average it falls behind.

View our latest analysis for Gallantt Ispat

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Gallantt Ispat has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Gallantt Ispat's ROCE Trend?

In terms of Gallantt Ispat's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 11% from 16% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Gallantt Ispat is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 64% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you're still interested in Gallantt Ispat it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Gallantt Ispat 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.

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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.