Indraprastha Gas (NSE:IGL) Is Reinvesting To Multiply In Value

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at Indraprastha Gas' (NSE:IGL) ROCE trend, we were very happy with what we saw.

What Is 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. 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 = ₹19b ÷ (₹134b - ₹39b) (Based on the trailing twelve months to December 2023).

So, Indraprastha Gas has an ROCE of 20%. In absolute terms that's a very respectable return and compared to the Gas Utilities industry average of 18% it's pretty much on par.

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're interested, you can view the analysts predictions in our free analyst report for Indraprastha Gas .

How Are Returns Trending?

Indraprastha Gas deserves to be commended in regards to it's returns. The company has consistently earned 20% for the last five years, and the capital employed within the business has risen 121% in that time. Now considering ROCE is an attractive 20%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. If Indraprastha Gas can keep this up, we'd be very optimistic about its future.

The Key Takeaway

In short, we'd argue Indraprastha Gas has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Therefore it's no surprise that shareholders have earned a respectable 58% return if they held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One more thing to note, we've identified 1 warning sign with Indraprastha Gas and understanding this should be part of your investment process.

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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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.