There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Ergo, when we looked at the ROCE trends at Indraprastha Gas (NSE:IGL), we liked what we saw.
Return On Capital Employed (ROCE): What is it?
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. The formula for this calculation on Indraprastha Gas is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = ₹15b ÷ (₹90b - ₹24b) (Based on the trailing twelve months to June 2021).
So, Indraprastha Gas has an ROCE of 22%. In absolute terms that's a great return but compared to the Gas Utilities industry average of 30% it falls short.
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 The Trend Of ROCE Can Tell Us
It's hard not to be impressed by Indraprastha Gas' returns on capital. The company has consistently earned 22% for the last five years, and the capital employed within the business has risen 142% 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.
The Bottom Line
In summary, we're delighted to see that Indraprastha Gas has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable 210% return to those who've held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
While Indraprastha Gas looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether IGL is currently trading for a fair price.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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.
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