If you're not sure where to start when looking for the next multi-bagger, there are some key trends to look out for. First, we'll want to see a proof return on capital employed (ROCE) that is increasing, and secondly, an expansion base of capital employed. Ultimately, this shows that it is a business that reinvests profits at increasing rates of return. Speaking of which, we noticed some big changes in Torrent Power's (NSE: TORNTPOWER) returns on capital, so let's take a look.
Return on Capital Employed (ROCE): What is it?
Just to clarify if you're not sure, ROCE is a metric for evaluating the amount of 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 taxes (EBIT) รท (Total assets - Current liabilities)
0.15 = 34 trillion rupees รท (295 trillion rupees - 63 trillion rupees) (Based on the last twelve months up to December 2022).
Therefore, Torrent Power has a ROCE of 15%. In absolute terms, it's a satisfactory return, but compared to the Electric Utilities industry average of 7.3% it's much better.
See our latest Torrent Power review
Above you can see how Torrent Power's current ROCE compares to its previous capital returns, but there's not much I can say about the past. If you want to see what analysts are forecasting in the future, you should check out our free Report for Torrent Power.
So what is the ROCE trend of Torrent Power?
Torrent Power is showing some positive trends. The data shows that the return on capital has increased substantially in the last five years to 15%. The company is effectively making more money for every dollar of capital used, and it's worth noting that the amount of capital has also increased by 22%. Increasing returns on an increasing amount of capital are common among multi-baggers and that is why we are impressed.
However, for the record, there was a notable increase in the company's current liabilities during the period, so we would attribute some of the ROCE growth to that. Effectively, this means that suppliers or short-term creditors now finance 21% of the business, which is more than it was five years ago. Watch for future increases because when the ratio of current liabilities to total assets becomes particularly high, this can present some new risks to the business.
Our version of the ROCE from Torrent Power
In short, Torrent Power has shown that you can reinvest in the business and generate higher returns on that invested capital, which is fantastic. And since stocks have performed exceptionally well over the last five years, investors are taking these patterns into account. So, since the stock has shown promising trends, it's worth investigating the company further to see if these trends are likely to persist.
If you want to continue investigating Torrent Power, you may be interested in knowing about the 4 warning signs that our analysis has discovered.
If you want to look for strong companies with great profits, check this out free list of companies with good balance sheets and impressive return on equity.
Valuation is complex, but we are helping to simplify it.
Find out if torrent power is potentially overvalued or undervalued by consulting our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, internal transactions and financial health.
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This Simply Wall St article is general in nature. We provide feedback based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell any stock, and it does not take into account your goals or financial situation. Our goal is to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative material. Simply Wall St does not have a position in any of the mentioned stocks.
