Returns On Capital At Gujarat Industries Power (NSE:GIPCL) Paint A Concerning Picture

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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 investigating Gujarat Industries Power (NSE:GIPCL), we don't think it's current trends fit the mold of a multi-bagger.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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 ÷ (₹42b - ₹3.4b) (Based on the trailing twelve months to March 2021).

Therefore, Gujarat Industries Power has an ROCE of 7.3%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 6.3%.

View 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.

The Trend Of ROCE

When we looked at the ROCE trend at Gujarat Industries Power, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.3% from 11% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

In Conclusion...

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 26% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you'd like to know about the risks facing Gujarat Industries Power, we've discovered 1 warning sign that you should be aware of.

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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