Be Wary Of Indraprastha Gas (NSE:IGL) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Indraprastha Gas (NSE:IGL), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

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 Indraprastha Gas is:

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

0.20 = ₹16b ÷ (₹111b - ₹31b) (Based on the trailing twelve months to March 2022).

Thus, Indraprastha Gas has an ROCE of 20%. On its own, that's a very good return and it's on par with the returns earned by companies in a similar industry.

View our latest analysis for Indraprastha Gas

In the above chart we have measured Indraprastha 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 Indraprastha Gas.

What Can We Tell From Indraprastha Gas' ROCE Trend?

In terms of Indraprastha Gas' historical ROCE movements, the trend isn't fantastic. Historically returns on capital were even higher at 25%, but they have dropped over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Indraprastha Gas' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Indraprastha Gas. And the stock has followed suit returning a meaningful 69% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Indraprastha Gas could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

Indraprastha 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.