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

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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.

Return On Capital Employed (ROCE): What is it?

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

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

0.077 = ₹2.8b ÷ (₹39b - ₹2.6b) (Based on the trailing twelve months to June 2020).

So, Gujarat Industries Power has an ROCE of 7.7%. On its own that's a low return, but compared to the average of 6.0% generated by the Renewable Energy industry, it's much better.

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 want to delve into the historical earnings, revenue and cash flow of Gujarat Industries Power, check out these free graphs here.

What The Trend Of ROCE Can 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 12%, but since then they've fallen to 7.7%. 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

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 21% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you want to continue researching Gujarat Industries Power, you might be interested to know about the 1 warning sign that our analysis has discovered.

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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