- Gas Utilities
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? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Speaking of which, we noticed some great changes in Gujarat Gas' (NSE:GUJGASLTD) returns on capital, so let's have a look.
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. Analysts use this formula to calculate it for Gujarat Gas:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.29 = ₹21b ÷ (₹101b - ₹26b) (Based on the trailing twelve months to December 2022).
Thus, Gujarat Gas has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 21% earned by companies in a similar industry.
Check out our latest analysis for Gujarat Gas
Above you can see how the current ROCE for Gujarat Gas compares to its prior returns on capital, but there's only so much you can tell from the past. 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?
The trends we've noticed at Gujarat Gas are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 29%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 48%. So we're very much inspired by what we're seeing at Gujarat Gas thanks to its ability to profitably reinvest capital.
The Bottom Line
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Gujarat Gas has. And a remarkable 206% 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.
One more thing, we've spotted 1 warning sign facing Gujarat Gas that you might find interesting.
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.
Gujarat Gas Limited engages in the distribution of natural gas in India.
Outstanding track record with excellent balance sheet.