NTPC's (NSE:NTPC) Returns On Capital Are Heading Higher

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at NTPC (NSE:NTPC) so let's look a bit deeper.

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. Analysts use this formula to calculate it for NTPC:

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

0.10 = ₹380b ÷ (₹4.5t - ₹823b) (Based on the trailing twelve months to September 2023).

Thus, NTPC has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Renewable Energy industry average of 8.5% it's much better.

Check out our latest analysis for NTPC

In the above chart we have measured NTPC's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for NTPC.

What Does the ROCE Trend For NTPC Tell Us?

NTPC is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 10%. The amount of capital employed has increased too, by 46%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what NTPC has. 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 NTPC can keep these trends up, it could have a bright future ahead.

On a final note, we've found 2 warning signs for NTPC that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.