Gulf Oil Lubricants India (NSE:GULFOILLUB) Will Want To Turn Around Its Return Trends

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. Having said that, while the ROCE is currently high for Gulf Oil Lubricants India (NSE:GULFOILLUB), we aren't jumping out of our chairs because returns are decreasing.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Gulf Oil Lubricants India:

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

0.28 = ₹4.2b ÷ (₹26b - ₹11b) (Based on the trailing twelve months to December 2024).

Thus, Gulf Oil Lubricants India has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Chemicals industry average of 13%.

Check out our latest analysis for Gulf Oil Lubricants India

In the above chart we have measured Gulf Oil Lubricants India's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Gulf Oil Lubricants India .

What Does the ROCE Trend For Gulf Oil Lubricants India Tell Us?

When we looked at the ROCE trend at Gulf Oil Lubricants India, we didn't gain much confidence. Historically returns on capital were even higher at 39%, but they have dropped over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Another thing to note, Gulf Oil Lubricants India has a high ratio of current liabilities to total assets of 43%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Gulf Oil Lubricants India's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Gulf Oil Lubricants India. And the stock has done incredibly well with a 123% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you want to continue researching Gulf Oil Lubricants India, you might be interested to know about the 1 warning sign that our analysis has discovered.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.