Stock Analysis

Torrent Power's (NSE:TORNTPOWER) Returns On Capital Are Heading Higher

NSEI:TORNTPOWER
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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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Torrent Power's (NSE:TORNTPOWER) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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 Torrent Power:

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

0.15 = ₹34b ÷ (₹295b - ₹63b) (Based on the trailing twelve months to December 2022).

Therefore, Torrent Power has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Electric Utilities industry average of 7.3% it's much better.

See our latest analysis for Torrent Power

roce
NSEI:TORNTPOWER Return on Capital Employed March 12th 2023

Above you can see how the current ROCE for Torrent Power compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Torrent Power.

So How Is Torrent Power's ROCE Trending?

Torrent Power is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 15%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 22%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 21% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

Our Take On Torrent Power's ROCE

To sum it up, Torrent Power has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you want to continue researching Torrent Power, you might be interested to know about the 4 warning signs that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Valuation is complex, but we're helping make it simple.

Find out whether Torrent Power is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.