Returns On Capital At Orient Green Power (NSE:GREENPOWER) Have Hit The Brakes

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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)

0.058 = ₹868m ÷ (₹17b - ₹2.1b) (Based on the trailing twelve months to March 2023).

Therefore, Orient Green Power has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 8.2%.

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

What The Trend Of ROCE Can Tell Us

We're a bit concerned with the trends, because the business is applying 27% less capital than it was five years ago and returns on that capital have stayed flat. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. In addition to that, since the ROCE doesn't scream "quality" at 5.8%, it's hard to get excited about these developments.

The Bottom Line

Overall, we're not ecstatic to see Orient Green Power reducing the amount of capital it employs in the business. Although the market must be expecting these trends to improve because the stock has gained 74% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Orient Green Power (of which 1 is a bit unpleasant!) that you should know about.

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.