Godawari Power & Ispat (NSE:GPIL) Is Achieving High Returns On Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Godawari Power & Ispat (NSE:GPIL) we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Godawari Power & Ispat, this is the formula:

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

0.25 = ₹7.5b ÷ (₹34b - ₹4.6b) (Based on the trailing twelve months to December 2020).

Therefore, Godawari Power & Ispat has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 9.8%.

Check out our latest analysis for Godawari Power & 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're interested in investigating Godawari Power & Ispat's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Godawari Power & Ispat. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 25%. Basically the business is earning more per dollar of capital invested and in addition to that, 22% more capital is being employed now too. So we're very much inspired by what we're seeing at Godawari Power & Ispat thanks to its ability to profitably reinvest capital.

One more thing to note, Godawari Power & Ispat has decreased current liabilities to 13% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

Our Take On Godawari Power & Ispat's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Godawari Power & Ispat has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing to note, we've identified 4 warning signs with Godawari Power & Ispat and understanding them should be part of your investment process.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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