We're Watching These Trends At NHPC (NSE:NHPC)

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after briefly looking over the numbers, we don't think NHPC (NSE:NHPC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for NHPC, this is the formula:

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

0.061 = ₹39b ÷ (₹713b - ₹68b) (Based on the trailing twelve months to June 2020).

So, NHPC has an ROCE of 6.1%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 6.7%.

View our latest analysis for NHPC

In the above chart we have measured NHPC's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering NHPC here for free.

What Can We Tell From NHPC's ROCE Trend?

Over the past five years, NHPC's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if NHPC doesn't end up being a multi-bagger in a few years time. With fewer investment opportunities, it makes sense that NHPC has been paying out a decent 56% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

The Key Takeaway

We can conclude that in regards to NHPC's returns on capital employed and the trends, there isn't much change to report on. Since the stock has gained an impressive 66% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

NHPC does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.

While NHPC may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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