Gujarat Industries Power (NSE:GIPCL) May Have Issues Allocating Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Gujarat Industries Power (NSE:GIPCL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Gujarat Industries Power:

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

0.046 = ₹2.4b ÷ (₹55b - ₹2.5b) (Based on the trailing twelve months to September 2024).

Thus, Gujarat Industries Power has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 6.0%.

View our latest analysis for Gujarat Industries Power

Above you can see how the current ROCE for Gujarat Industries Power compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Gujarat Industries Power .

How Are Returns Trending?

In terms of Gujarat Industries Power's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.6% from 9.8% five years ago. However it looks like Gujarat Industries Power 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 Gujarat Industries Power's ROCE

To conclude, we've found that Gujarat Industries Power is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 216% 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.

On a final note, we've found 1 warning sign for Gujarat Industries Power that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.