Adani Total Gas (NSE:ATGL) Could Become A Multi-Bagger

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at Adani Total Gas' (NSE:ATGL) look very promising so lets take a look.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Adani Total Gas, this is the formula:

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

0.23 = ₹6.9b ÷ (₹44b - ₹15b) (Based on the trailing twelve months to March 2022).

Thus, Adani Total Gas has an ROCE of 23%. In absolute terms that's a very respectable return and compared to the Gas Utilities industry average of 21% it's pretty much on par.

Check out our latest analysis for Adani Total Gas

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

The Trend Of ROCE

Investors would be pleased with what's happening at Adani Total Gas. The data shows that returns on capital have increased substantially over the last five years to 23%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 122%. So we're very much inspired by what we're seeing at Adani Total Gas thanks to its ability to profitably reinvest capital.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 33% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Key Takeaway

To sum it up, Adani Total Gas has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 1,397% total return over the last three years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing: We've identified 4 warning signs with Adani Total Gas (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.