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

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, the ROCE of Gujarat Gas (NSE:GUJGASLTD) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Gujarat Gas is:

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

0.24 = ₹20b ÷ (₹109b - ₹28b) (Based on the trailing twelve months to March 2023).

Therefore, Gujarat Gas has an ROCE of 24%. In absolute terms that's a very respectable return and compared to the Gas Utilities industry average of 21% it's pretty much on par.

View 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'd like to see what analysts are forecasting going forward, you should check out our free report for Gujarat Gas.

The Trend Of ROCE

Gujarat Gas is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 24%. 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 57%. So we're very much inspired by what we're seeing at Gujarat Gas thanks to its ability to profitably reinvest capital.

Our Take On Gujarat Gas' ROCE

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 with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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 1 warning sign for Gujarat Gas that you might be interested in.

Gujarat Gas is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.