Investors Should Be Encouraged By Gujarat Gas' (NSE:GUJGASLTD) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Gujarat Gas' (NSE:GUJGASLTD) look very promising so lets take a look.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Gujarat Gas:

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

0.24 = ₹18b ÷ (₹101b - ₹26b) (Based on the trailing twelve months to September 2022).

Thus, Gujarat Gas has an ROCE of 24%. On its own, that's a very good return and it's on par with the returns earned by companies in a similar industry.

Check out our latest analysis for Gujarat Gas

In the above chart we have measured Gujarat Gas' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Gujarat Gas Tell Us?

Gujarat Gas is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 24%. Basically the business is earning more per dollar of capital invested and in addition to that, 48% more capital is being employed now too. So we're very much inspired by what we're seeing at Gujarat Gas thanks to its ability to profitably reinvest capital.

What We Can Learn From Gujarat Gas' ROCE

To sum it up, Gujarat Gas has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 211% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Gujarat Gas can keep these trends up, it could have a bright future ahead.

Gujarat Gas does have some risks though, and we've spotted 3 warning signs for Gujarat Gas that you might be interested in.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.