GMR Power And Urban Infra (NSE:GMRP&UI) aims to further increase its return on capital

What trends should we look for when we want to identify stocks that can multiply in value over the long term? In a perfect world, we would like to see a company invest more capital in its business and, ideally, the returns generated from that capital also increase. When you see this, it usually means it is a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind: GMR Power and Urban Infrastructure (NSE:GMRP&UI) looks quite promising in terms of return on capital growth.

Understanding Return on Capital Employed (ROCE)

For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return) relative to the capital employed in the business. The formula for this calculation at GMR Power And Urban Infra is:

Return on capital = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)

0.17 = ₹17 billion ÷ (₹195 billion – ₹95 billion) (Based on the last twelve months to March 2024).

Therefore, GMR Power And Urban Infra has a ROCE of 17%. This is a relatively normal return on capital and is around 15%, which is generated in the construction industry.

Check out our latest analysis for GMR Power and Urban Infra

While the past is not representative of the future, it can be useful to know a company’s historical performance, which is why we have this chart above. If you want to learn more about GMR Power And Urban Infra’s past, read this free Graph of GMR Power And Urban Infra’s past earnings, revenue and cash flow.

So how is the ROCE of GMR Power and Urban Infra developing?

Investors should be pleased with what is happening at GMR Power And Urban Infra. Over the past three years, the return on capital has increased significantly to 17%. The company is effectively making more money per dollar of capital employed, and it is worth noting that the amount of capital invested has also increased by 46%. This may indicate that there are many opportunities to invest capital internally and at increasingly higher interest rates, a combination that is common among multibaggers.

Also, it’s important to note that GMR Power And Urban Infra has a high ratio of current liabilities to total assets at 49%. This means that suppliers (or short-term creditors) are funding a large part of the business, so be aware that this may introduce some risk. Ideally, we would like to see this figure reduced, as it would mean fewer risky liabilities.

Our assessment of the ROCE of GMR Power and Urban Infra

All in all, it’s great to see GMR Power And Urban Infra reaping the rewards of past investments and growing its capital base. And a remarkable total return of 400% over the past year tells us that investors expect even more good things to come in the future. With that in mind, we think this stock is worth taking a closer look at because if GMR Power And Urban Infra can maintain these trends, the company could have a bright future ahead of it.

If you want to know more about GMR Power and Urban Infra, we discovered: 3 warning signs, and 2 of them are a bit unpleasant.

For those who like to invest in solid companies, look at this free List of companies with solid balance sheets and high returns on equity.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.