Capital Investments At Indraprastha Gas (NSE:IGL) Point To A Promising Future

By
Simply Wall St
Published
February 24, 2022
NSEI:IGL
Source: Shutterstock

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. That's why when we briefly looked at Indraprastha Gas' (NSE:IGL) ROCE trend, we were very happy with what we saw.

Understanding 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 Indraprastha Gas:

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

0.22 = ₹16b ÷ (₹101b - ₹30b) (Based on the trailing twelve months to December 2021).

So, Indraprastha Gas has an ROCE of 22%. In absolute terms that's a very respectable return and compared to the Gas Utilities industry average of 23% it's pretty much on par.

View our latest analysis for Indraprastha Gas

roce
NSEI:IGL Return on Capital Employed February 24th 2022

Above you can see how the current ROCE for Indraprastha Gas compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Indraprastha Gas here for free.

What Can We Tell From Indraprastha Gas' ROCE Trend?

Indraprastha Gas deserves to be commended in regards to it's returns. The company has consistently earned 22% for the last five years, and the capital employed within the business has risen 138% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

In Conclusion...

Indraprastha Gas has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Like most companies, Indraprastha Gas does come with some risks, and we've found 1 warning sign that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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