To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Although, when we looked at Adani Total Gas (NSE:ATGL), it didn't seem to tick all of these boxes.
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. The formula for this calculation on Adani Total Gas is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = ₹9.9b ÷ (₹68b - ₹15b) (Based on the trailing twelve months to September 2024).
Thus, Adani Total Gas has an ROCE of 19%. That's a relatively normal return on capital, and it's around the 16% generated by the Gas Utilities industry.
View 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'd like to look at how Adani Total Gas has performed in the past in other metrics, you can view this free graph of Adani Total Gas' past earnings, revenue and cash flow.
What Can We Tell From Adani Total Gas' ROCE Trend?
Unfortunately, the trend isn't great with ROCE falling from 27% five years ago, while capital employed has grown 215%. That being said, Adani Total Gas raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Adani Total Gas probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
The Key Takeaway
To conclude, we've found that Adani Total Gas is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 369% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
If you're still interested in Adani Total Gas it's worth checking out our FREE intrinsic value approximation for ATGL to see if it's trading at an attractive price in other respects.
While Adani Total Gas may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.
About NSEI:ATGL
Solid track record with mediocre balance sheet.
