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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Indus Gas (LON:INDI) and its ROCE trend, we weren't exactly thrilled.
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. The formula for this calculation on Indus Gas is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.011 = US$15m ÷ (US$1.4b - US$48m) (Based on the trailing twelve months to September 2024).
Thus, Indus Gas has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 9.6%.
View our latest analysis for Indus Gas
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Indus Gas.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Indus Gas doesn't inspire confidence. Around five years ago the returns on capital were 6.3%, but since then they've fallen to 1.1%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
The Bottom Line
From the above analysis, we find it rather worrisome that returns on capital and sales for Indus Gas have fallen, meanwhile the business is employing more capital than it was five years ago. This could explain why the stock has sunk a total of 97% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Indus Gas does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those shouldn't be ignored...
While Indus Gas isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.