Here's What To Make Of Orient Green Power's (NSE:GREENPOWER) Decelerating Rates Of Return

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Orient Green Power (NSE:GREENPOWER), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. The formula for this calculation on Orient Green Power is:

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

0.067 = ₹1.1b ÷ (₹18b - ₹1.9b) (Based on the trailing twelve months to September 2023).

Therefore, Orient Green Power has an ROCE of 6.7%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 8.0%.

See our latest analysis for Orient Green Power

Historical performance is a great place to start when researching a stock so above you can see the gauge for Orient Green Power's ROCE against it's prior returns. If you're interested in investigating Orient Green Power's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Over the past five years, Orient Green Power's ROCE has remained relatively flat while the business is using 22% less capital than before. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. In addition to that, since the ROCE doesn't scream "quality" at 6.7%, it's hard to get excited about these developments.

Our Take On Orient Green Power's ROCE

In summary, Orient Green Power isn't reinvesting funds back into the business and returns aren't growing. Yet to long term shareholders the stock has gifted them an incredible 360% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to know some of the risks facing Orient Green Power we've found 4 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Orient Green 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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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.