Genus Power Infrastructures (NSE:GENUSPOWER) Could Be Struggling To Allocate Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. In light of that, when we looked at Genus Power Infrastructures (NSE:GENUSPOWER) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.039 = ₹392m ÷ (₹15b - ₹5.0b) (Based on the trailing twelve months to March 2022).

So, Genus Power Infrastructures has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 8.3%.

See our latest analysis for Genus Power Infrastructures

Historical performance is a great place to start when researching a stock so above you can see the gauge for Genus Power Infrastructures' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Genus Power Infrastructures, check out these free graphs here.

What Can We Tell From Genus Power Infrastructures' ROCE Trend?

When we looked at the ROCE trend at Genus Power Infrastructures, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.9% from 10% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From Genus Power Infrastructures' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Genus Power Infrastructures is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 63% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing: We've identified 3 warning signs with Genus Power Infrastructures (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

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.