Returns At Indowind Energy (NSE:INDOWIND) Are On The Way Up

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Speaking of which, we noticed some great changes in Indowind Energy's (NSE:INDOWIND) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Indowind Energy is:

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

0.03 = ₹87m ÷ (₹3.1b - ₹215m) (Based on the trailing twelve months to March 2024).

Therefore, Indowind Energy has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 5.8%.

Check out our latest analysis for Indowind Energy

Historical performance is a great place to start when researching a stock so above you can see the gauge for Indowind Energy's ROCE against it's prior returns. If you're interested in investigating Indowind Energy's past further, check out this free graph covering Indowind Energy's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

While there are companies with higher returns on capital out there, we still find the trend at Indowind Energy promising. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 4,313% over the last five years. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

What We Can Learn From Indowind Energy's ROCE

As discussed above, Indowind Energy appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Indowind Energy can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 2 warning signs with Indowind Energy and understanding them should be part of your investment process.

While Indowind Energy 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.