Adani Power (NSE:ADANIPOWER) Is Very Good At Capital Allocation

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of Adani Power (NSE:ADANIPOWER) we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Adani Power, this is the formula:

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

0.22 = ₹169b ÷ (₹923b - ₹158b) (Based on the trailing twelve months to June 2024).

So, Adani Power has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Renewable Energy industry average of 5.9%.

See our latest analysis for Adani Power

Historical performance is a great place to start when researching a stock so above you can see the gauge for Adani Power's ROCE against it's prior returns. If you'd like to look at how Adani Power has performed in the past in other metrics, you can view this free graph of Adani Power's past earnings, revenue and cash flow.

So How Is Adani Power's ROCE Trending?

The trends we've noticed at Adani Power are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 22%. The amount of capital employed has increased too, by 54%. So we're very much inspired by what we're seeing at Adani Power thanks to its ability to profitably reinvest capital.

What We Can Learn From Adani Power's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Adani Power has. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing, we've spotted 2 warning signs facing Adani Power that you might find interesting.

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.