Energy Development (NSE:ENERGYDEV) Is Looking To Continue Growing Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Energy Development's (NSE:ENERGYDEV) returns on capital, so let's have a look.

Understanding 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. To calculate this metric for Energy Development, this is the formula:

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

0.10 = ₹192m ÷ (₹3.5b - ₹1.6b) (Based on the trailing twelve months to June 2022).

Thus, Energy Development has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Electric Utilities industry average of 7.2% it's much better.

Check out our latest analysis for Energy Development

Historical performance is a great place to start when researching a stock so above you can see the gauge for Energy Development's ROCE against it's prior returns. If you're interested in investigating Energy Development's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Energy Development has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 3,924%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Energy Development appears to been achieving more with less, since the business is using 31% less capital to run its operation. Energy Development may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 46% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

Our Take On Energy Development's ROCE

In a nutshell, we're pleased to see that Energy Development has been able to generate higher returns from less capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 14% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One final note, you should learn about the 2 warning signs we've spotted with Energy Development (including 1 which is significant) .

While Energy Development 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.