If we want to find a stock that can multiply over the long term, what are the underlying trends we should look for? First, we'll want to look at a proven method. return on capital employed (ROCE) which is increasing and, secondly, an expansion base of the capital employed. If you see this, it usually means they are a company with a great business model and many profitable reinvestment opportunities. Speaking of which, we noticed some big changes in The power of the torrent (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 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 Taxes (EBIT) รท (Total Assets - Current Liabilities)
0.15 = 37 billion rupees รท (320 billion rupees - 73 billion rupees) (Based on the trailing twelve months to September 2023).
Therefore, Torrent Power has an ROCE of 15%. On its own, it's standard performance; however, it is much better than the 7.4% generated by the electric utility industry.
See our latest analysis for Torrent Power
Above you can see how Torrent Power's current ROCE compares to its past returns on equity, but there's a lot you can say about the past. If you want to see what analysts are predicting in the future, you should check out our free report for Torrent Power.
What is the trend of returns?
Torrent Power shows promise as its ROCE is trending upward and to the right. The figures show that in the last five years, ROCE has grown by 47% using approximately the same amount of capital. Basically the business is generating higher returns with the same amount of capital and that is proof that there are improvements in the company's efficiency. The company is doing well in that regard and it is worth investigating what the management team has planned for long-term growth prospects.
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. Basically, the company now has suppliers or short-term creditors financing around 23% of its operations, which is not ideal. It is worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
The bottom line
As discussed above, Torrent Power appears to be becoming increasingly proficient at generating profitability, as capital employed has remained stable but earnings (before interest and taxes) have increased. Given that the stock has delivered a staggering 380% return for shareholders over the last five years, it appears investors are recognizing these changes. In view of this, we think it is worth taking a deeper look at this stock because if Torrent Power can maintain these trends, it could have a bright future ahead.
One more thing, we have detected 2 warning signs versus Torrent Power which may be interesting to you.
While Torrent Power doesn't get the best performance, check this out free list of companies earning high returns on equity with strong balance sheets.
Valuation is complex, but we are helping to simplify it.
Find out if torrent power is potentially overvalued or undervalued by checking out our full analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your objectives or financial situation. Our goal is to provide you with focused, long-term 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 has no position in any of the stocks mentioned.
