Some Investors May Be Worried About India Power's (NSE:DPSCLTD) Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at India Power (NSE:DPSCLTD), so let's see why.

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. Analysts use this formula to calculate it for India Power:

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

0.00091 = ₹14m ÷ (₹21b - ₹5.6b) (Based on the trailing twelve months to June 2024).

Therefore, India Power has an ROCE of 0.09%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 8.0%.

Check out our latest analysis for India Power

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating India Power's past further, check out this free graph covering India Power's past earnings, revenue and cash flow.

What Does the ROCE Trend For India Power Tell Us?

We are a bit worried about the trend of returns on capital at India Power. About five years ago, returns on capital were 2.0%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect India Power to turn into a multi-bagger.

What We Can Learn From India Power's ROCE

In summary, it's unfortunate that India Power is generating lower returns from the same amount of capital. However the stock has delivered a 90% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to continue researching India Power, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.