Stock Analysis

Return Trends At India Power (NSE:DPSCLTD) Aren't Appealing

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NSEI:DPSCLTD
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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 India Power (NSE:DPSCLTD), it didn't seem to tick all of these boxes.

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 India Power, this is the formula:

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

0.024 = ₹492m ÷ (₹25b - ₹5.0b) (Based on the trailing twelve months to December 2020).

Therefore, India Power has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 7.4%.

View our latest analysis for India Power

roce
NSEI:DPSCLTD Return on Capital Employed May 20th 2021

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

What Can We Tell From India Power's ROCE Trend?

We're a bit concerned with the trends, because the business is applying 25% less capital than it was five years ago and returns on that capital have stayed flat. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

In Conclusion...

Overall, we're not ecstatic to see India Power reducing the amount of capital it employs in the business. And in the last five years, the stock has given away 30% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a separate note, we've found 1 warning sign for India Power you'll probably want to know about.

While India Power 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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