Returns At Energy Development (NSE:ENERGYDEV) Are On The Way Up

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Energy Development (NSE:ENERGYDEV) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Energy Development:

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

0.035 = ₹67m ÷ (₹3.6b - ₹1.7b) (Based on the trailing twelve months to September 2023).

Therefore, Energy Development has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 7.4%.

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'd like to look at how Energy Development has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Energy Development's ROCE Trending?

It's nice to see that ROCE is headed in the right direction, even if it is still relatively low. The figures show that over the last five years, returns on capital have grown by 45%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 28% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

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. Essentially the business now has suppliers or short-term creditors funding about 47% of its operations, which isn't ideal. 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. Since the stock has returned a staggering 250% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we found 3 warning signs for Energy Development (1 is a bit concerning) you should be aware of.

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.