Gujarat Industries Power (NSE:GIPCL) Might Be Having Difficulty Using Its Capital Effectively

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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.

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. The formula for this calculation on Gujarat Industries Power is:

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

0.076 = ₹2.9b ÷ (₹41b - ₹2.5b) (Based on the trailing twelve months to December 2020).

Therefore, Gujarat Industries Power has an ROCE of 7.6%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 7.0%.

View our latest analysis for Gujarat Industries Power

Historical performance is a great place to start when researching a stock so above you can see the gauge for Gujarat Industries Power's ROCE against it's prior returns. If you'd like to look at how Gujarat Industries Power has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Gujarat Industries Power's ROCE Trending?

In terms of Gujarat Industries Power's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 11% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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

Bringing it all together, while we're somewhat encouraged by Gujarat Industries Power's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 12% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you're still interested in Gujarat Industries Power it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

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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