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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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)?
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 Mahanagar Gas:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.28 = ₹11b ÷ (₹51b - ₹13b) (Based on the trailing twelve months to September 2021).
Thus, Mahanagar Gas has an ROCE of 28%. While that is an outstanding return, the rest of the Gas Utilities industry generates similar returns, on average.
Check out our latest analysis for Mahanagar Gas
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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 Can We Tell From Mahanagar Gas' ROCE Trend?
It's hard not to be impressed by Mahanagar Gas' returns on capital. Over the past five years, ROCE has remained relatively flat at around 28% and the business has deployed 102% more capital into its operations. Now considering ROCE is an attractive 28%, 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.
The Bottom Line On Mahanagar Gas' ROCE
In short, we'd argue Mahanagar Gas has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And given the stock has only risen 29% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if Mahanagar Gas is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.
Like most companies, Mahanagar Gas does come with some risks, and we've found 2 warning signs that you should be aware of.
Mahanagar Gas is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
About NSEI:MGL
Flawless balance sheet average dividend payer.
