Here's What To Make Of Gujarat Industries Power's (NSE:GIPCL) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. However, after briefly looking over the numbers, we don't think Gujarat Industries Power (NSE:GIPCL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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

0.073 = ₹2.8b ÷ (₹41b - ₹2.5b) (Based on the trailing twelve months to September 2020).

Thus, Gujarat Industries Power has an ROCE of 7.3%. In absolute terms, that's a low return, but it's much better than the Renewable Energy industry average of 6.1%.

Check out our latest analysis for Gujarat Industries Power

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Gujarat Industries Power, check out these free graphs here.

What Does the ROCE Trend For Gujarat Industries Power Tell Us?

On the surface, the trend of ROCE at Gujarat Industries Power doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 7.3%. 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 may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that Gujarat Industries Power is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 19% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Gujarat Industries Power could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Gujarat Industries Power 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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