Should You Be Impressed By NTPC's (NSE:NTPC) Returns on Capital?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at NTPC (NSE:NTPC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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

0.077 = ₹244b ÷ (₹4.0t - ₹788b) (Based on the trailing twelve months to December 2020).

Thus, NTPC has an ROCE of 7.7%. On its own, that's a low figure but it's around the 7.0% average generated by the Renewable Energy industry.

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From NTPC's ROCE Trend?

In terms of NTPC's historical ROCE trend, it doesn't exactly demand attention. The company has employed 70% more capital in the last five years, and the returns on that capital have remained stable at 7.7%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

In Conclusion...

Long story short, while NTPC has been reinvesting its capital, the returns that it's generating haven't increased. And with the stock having returned a mere 18% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One final note, you should learn about the 2 warning signs we've spotted with NTPC (including 1 which is a bit concerning) .

While NTPC 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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This article by Simply Wall St is general in nature. 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.
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