GVK Power & Infrastructure (NSE:GVKPIL) Shareholders Will Want The ROCE Trajectory To Continue

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at GVK Power & Infrastructure (NSE:GVKPIL) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on GVK Power & Infrastructure is:

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

0.19 = ₹7.7b ÷ (₹82b - ₹42b) (Based on the trailing twelve months to December 2023).

So, GVK Power & Infrastructure has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Renewable Energy industry average of 8.8% it's much better.

View our latest analysis for GVK Power & Infrastructure

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of GVK Power & Infrastructure.

The Trend Of ROCE

You'd find it hard not to be impressed with the ROCE trend at GVK Power & Infrastructure. The figures show that over the last five years, returns on capital have grown by 192%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 73% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 51% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On GVK Power & Infrastructure's ROCE

From what we've seen above, GVK Power & Infrastructure has managed to increase it's returns on capital all the while reducing it's capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 51% return over the last five years. In light of that, we think it's worth looking further into this stock because if GVK Power & Infrastructure can keep these trends up, it could have a bright future ahead.

On a final note, we found 3 warning signs for GVK Power & Infrastructure (1 can't be ignored) you should be aware of.

While GVK Power & Infrastructure isn't earning the highest return, check out this free list of companies that are 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.