I G Petrochemicals (NSE:IGPL) Is Reinvesting At Lower Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. However, after investigating I G Petrochemicals (NSE:IGPL), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for I G Petrochemicals, this is the formula:

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

0.054 = ₹860m ÷ (₹22b - ₹6.4b) (Based on the trailing twelve months to September 2024).

Thus, I G Petrochemicals has an ROCE of 5.4%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 13%.

Check out our latest analysis for I G Petrochemicals

In the above chart we have measured I G Petrochemicals' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for I G Petrochemicals .

So How Is I G Petrochemicals' ROCE Trending?

When we looked at the ROCE trend at I G Petrochemicals, we didn't gain much confidence. Around five years ago the returns on capital were 8.9%, but since then they've fallen to 5.4%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From I G Petrochemicals' ROCE

Bringing it all together, while we're somewhat encouraged by I G Petrochemicals' reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 168% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing to note, we've identified 2 warning signs with I G Petrochemicals and understanding these should be part of your investment process.

While I G Petrochemicals isn't earning the highest return, check out this free list of companies that are 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.