Will Gallantt Ispat (NSE:GALLISPAT) Multiply In Value Going Forward?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. In light of that, when we looked at Gallantt Ispat (NSE:GALLISPAT) and its ROCE trend, we weren't exactly thrilled.

What is 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)

0.074 = ₹858m ÷ (₹14b - ₹2.1b) (Based on the trailing twelve months to September 2020).

Thus, Gallantt Ispat has an ROCE of 7.4%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 9.7%.

Check out 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're interested in investigating Gallantt Ispat's past further, check out this free graph of past earnings, revenue and cash flow.

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

On the surface, the trend of ROCE at Gallantt Ispat doesn't inspire confidence. To be more specific, ROCE has fallen from 9.8% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Gallantt Ispat has decreased its current liabilities to 15% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Gallantt Ispat's ROCE

We're a bit apprehensive about Gallantt Ispat because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last five years have experienced a 23% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

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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