Many Would Be Jealous Of Mahanagar Gas' (NSE:MGL) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Ergo, when we looked at the ROCE trends at Mahanagar Gas (NSE:MGL), we liked what we saw.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Mahanagar Gas, this is the formula:

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

0.20 = ₹6.4b ÷ (₹44b - ₹12b) (Based on the trailing twelve months to September 2020).

Therefore, Mahanagar Gas has an ROCE of 20%. On its own, that's a very good return and it's on par with the returns earned by companies in a similar industry.

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 want to delve into the historical earnings, revenue and cash flow of Mahanagar Gas, check out these free graphs here.

So How Is Mahanagar Gas' ROCE Trending?

We'd be pretty happy with returns on capital like Mahanagar Gas. The company has employed 84% more capital in the last five years, and the returns on that capital have remained stable at 20%. 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 Mahanagar Gas can keep this up, we'd be very optimistic about its future.

What We Can Learn From Mahanagar Gas' ROCE

In summary, we're delighted to see that Mahanagar Gas has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. However, over the last three years, the stock has only delivered a 12% return to shareholders who held over that period. That's why it could be worth your time looking into this stock further to discover if it has more traits of a multi-bagger.

On a separate note, we've found 1 warning sign for Mahanagar Gas you'll probably want to know about.

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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