Should You Be Impressed By Gandhi Special Tubes' (NSE:GANDHITUBE) Returns on Capital?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Although, when we looked at Gandhi Special Tubes (NSE:GANDHITUBE), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Gandhi Special Tubes is:

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

0.098 = ₹154m ÷ (₹1.6b - ₹49m) (Based on the trailing twelve months to June 2020).

Thus, Gandhi Special Tubes has an ROCE of 9.8%. Even though it's in line with the industry average of 10%, it's still a low return by itself.

Check out our latest analysis for Gandhi Special Tubes

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 want to delve into the historical earnings, revenue and cash flow of Gandhi Special Tubes, check out these free graphs here.

The Trend Of ROCE

Things have been pretty stable at Gandhi Special Tubes, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Gandhi Special Tubes in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

Our Take On Gandhi Special Tubes' ROCE

In summary, Gandhi Special Tubes isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And investors may be recognizing these trends since the stock has only returned a total of 2.8% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a separate note, we've found 2 warning signs for Gandhi Special Tubes you'll probably want to know about.

While Gandhi Special Tubes 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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