Some Investors May Be Worried About Gallantt Ispat's (NSE:GALLANTT) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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.

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

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. The formula for this calculation on Gallantt Ispat is:

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

0.11 = ₹2.8b ÷ (₹31b - ₹5.8b) (Based on the trailing twelve months to December 2023).

Thus, Gallantt Ispat has an ROCE of 11%. In isolation, that's a pretty standard return but against the Metals and Mining industry average of 14%, it's not as good.

See our latest analysis for Gallantt Ispat

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

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

When we looked at the ROCE trend at Gallantt Ispat, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 11%. However it looks like Gallantt Ispat might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Gallantt Ispat's ROCE

Bringing it all together, while we're somewhat encouraged by Gallantt Ispat's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 430% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Gallantt Ispat does have some risks though, and we've spotted 1 warning sign for Gallantt Ispat that you might be interested in.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.