The Returns On Capital At GAIL (India) (NSE:GAIL) Don't Inspire Confidence

What trends should we look for it we want to identify stocks that can 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. Having said that, from a first glance at GAIL (India) (NSE:GAIL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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 GAIL (India):

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

0.10 = ₹106b ÷ (₹1.2t - ₹216b) (Based on the trailing twelve months to March 2024).

Thus, GAIL (India) has an ROCE of 10%. In isolation, that's a pretty standard return but against the Gas Utilities industry average of 17%, it's not as good.

Check out our latest analysis for GAIL (India)

Above you can see how the current ROCE for GAIL (India) compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering GAIL (India) for free.

What Can We Tell From GAIL (India)'s ROCE Trend?

When we looked at the ROCE trend at GAIL (India), we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 10%. However it looks like GAIL (India) might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On GAIL (India)'s ROCE

To conclude, we've found that GAIL (India) is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 183% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, GAIL (India) does come with some risks, and we've found 1 warning sign that you should be aware of.

While GAIL (India) isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com