Shareholders Would Enjoy A Repeat Of Gujarat State Petronet's (NSE:GSPL) Recent Growth In Returns

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Speaking of which, we noticed some great changes in Gujarat State Petronet's (NSE:GSPL) returns on capital, so let's have a look.

What is 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. To calculate this metric for Gujarat State Petronet, this is the formula:

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

0.32 = ₹36b ÷ (₹142b - ₹31b) (Based on the trailing twelve months to June 2021).

Therefore, Gujarat State Petronet has an ROCE of 32%. On its own, that's a very good return and it's on par with the returns earned by companies in a similar industry.

See our latest analysis for Gujarat State Petronet

Above you can see how the current ROCE for Gujarat State Petronet compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Gujarat State Petronet here for free.

What Does the ROCE Trend For Gujarat State Petronet Tell Us?

We like the trends that we're seeing from Gujarat State Petronet. Over the last five years, returns on capital employed have risen substantially to 32%. The amount of capital employed has increased too, by 106%. So we're very much inspired by what we're seeing at Gujarat State Petronet thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 22% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

In Conclusion...

In summary, it's great to see that Gujarat State Petronet can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 167% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Gujarat State Petronet does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.
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