Capital Investment Trends At Mahanagar Gas (NSE:MGL) Look Strong

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Ergo, when we looked at the ROCE trends at Mahanagar Gas (NSE:MGL), we liked what we saw.

What is Return On Capital Employed (ROCE)?

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 Mahanagar Gas is:

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

0.22 = ₹6.9b ÷ (₹44b - ₹12b) (Based on the trailing twelve months to December 2020).

So, Mahanagar Gas has an ROCE of 22%. In absolute terms that's a very respectable return and compared to the Gas Utilities industry average of 24% it's pretty much on par.

See our latest analysis for Mahanagar Gas

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mahanagar Gas' ROCE against it's prior returns. If you'd like to look at how Mahanagar Gas has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Mahanagar Gas Tell Us?

In terms of Mahanagar Gas' history of ROCE, it's quite impressive. The company has consistently earned 22% for the last five years, and the capital employed within the business has risen 84% in that time. Now considering ROCE is an attractive 22%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.

In Conclusion...

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. Therefore it's no surprise that shareholders have earned a respectable 44% return if they held over the last three years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Mahanagar Gas does have some risks though, and we've spotted 1 warning sign for Mahanagar Gas that you might be interested in.

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.

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