The Returns On Capital At Gandhar Oil Refinery (India) (NSE:GANDHAR) Don't Inspire Confidence

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. However, after briefly looking over the numbers, we don't think Gandhar Oil Refinery (India) (NSE:GANDHAR) 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 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. The formula for this calculation on Gandhar Oil Refinery (India) is:

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

0.11 = ₹1.5b ÷ (₹21b - ₹7.1b) (Based on the trailing twelve months to December 2024).

Thus, Gandhar Oil Refinery (India) has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Chemicals industry average of 13%.

See our latest analysis for Gandhar Oil Refinery (India)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gandhar Oil Refinery (India)'s ROCE against it's prior returns. If you're interested in investigating Gandhar Oil Refinery (India)'s past further, check out this free graph covering Gandhar Oil Refinery (India)'s past earnings, revenue and cash flow.

So How Is Gandhar Oil Refinery (India)'s ROCE Trending?

In terms of Gandhar Oil Refinery (India)'s historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 11% from 21% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

On a related note, Gandhar Oil Refinery (India) has decreased its current liabilities to 34% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Gandhar Oil Refinery (India)'s ROCE

To conclude, we've found that Gandhar Oil Refinery (India) is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 30% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Gandhar Oil Refinery (India) has the makings of a multi-bagger.

One more thing to note, we've identified 2 warning signs with Gandhar Oil Refinery (India) and understanding these should be part of your investment process.

While Gandhar Oil Refinery (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.

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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.