Capital Allocation Trends At Genus Power Infrastructures (NSE:GENUSPOWER) Aren't Ideal

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Genus Power Infrastructures (NSE:GENUSPOWER), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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 Genus Power Infrastructures:

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

0.064 = ₹1.1b ÷ (₹28b - ₹9.9b) (Based on the trailing twelve months to March 2024).

Therefore, Genus Power Infrastructures has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Electronic industry average of 15%.

See our latest analysis for Genus Power Infrastructures

Above you can see how the current ROCE for Genus Power Infrastructures compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Genus Power Infrastructures .

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Genus Power Infrastructures' ROCE has reduced by 44% over the last five years, while the business employed 111% more capital. That being said, Genus Power Infrastructures raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Genus Power Infrastructures might not have received a full period of earnings contribution from it.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Genus Power Infrastructures. And the stock has done incredibly well with a 1,639% 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.

Genus Power Infrastructures does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.

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