Investors Could Be Concerned With Ganesh Green Bharat's (NSE:GGBL) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Ganesh Green Bharat (NSE:GGBL), we aren't jumping out of our chairs because returns are decreasing.

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Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Ganesh Green Bharat is:

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

0.20 = ₹426m ÷ (₹2.4b - ₹298m) (Based on the trailing twelve months to September 2024).

So, Ganesh Green Bharat has an ROCE of 20%. By itself, that's a great ROCE but it falls short of the 27% generated by the Semiconductor industry.

See our latest analysis for Ganesh Green Bharat

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'd like to look at how Ganesh Green Bharat has performed in the past in other metrics, you can view this free graph of Ganesh Green Bharat's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Ganesh Green Bharat's historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 31%, but they have dropped over the last three years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Ganesh Green Bharat has decreased its current liabilities to 12% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Ganesh Green Bharat's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Ganesh Green Bharat is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 6.4% gain to shareholders who've held over the last year. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Ganesh Green Bharat does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.