Capital investment trends at Mahanagar Gas (NSE:MGL) look solid

Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; first growth to return to on capital employed (ROCE) and on the other hand, growth amount capital employed. Ultimately, this demonstrates that this is a company that reinvests its earnings at increasing rates of return. Therefore, when we looked at ROCE trends at Mahanagar Gas (NSE:MGL), we liked what we saw.

What is return on capital employed (ROCE)?

Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. Analysts use this formula to calculate it for Mahanagar Gas:

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

0.28 = ₹11b ÷ (₹51b – ₹13b) (Based on the last twelve months to September 2021).

Thereby, Mahanagar Gas has a ROCE of 28%. While this is an exceptional return, the rest of the gas utility industry generates similar returns, on average.

Check out our latest analysis for Mahanagar Gas

NSEI:MGL Return on Capital Employed December 18, 2021

Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to see how Mahanagar Gas has performed in the past in other metrics, you can see this free chart of past profits, revenue and cash flow.

What can we say about the ROCE trend of Mahanagar Gas?

It’s hard not to be impressed with Mahanagar Gas’ returns on capital. Over the past five years, ROCE has remained relatively stable at around 28% and the company has deployed 102% more capital into its operations. Now considering that the ROCE is an attractive 28%, this combination is actually quite attractive because it means the company can consistently put money to work and generate those high returns. You will see this when you look at well-run businesses or favorable business models.

Mahanagar Gas ROCE Basics

In short, we would say that Mahanagar Gas has the makings of a multi-bagger since it has been able to compound its capital at very profitable rates of return. And given that the stock has only risen 29% in the past five years, we suspect the market is starting to recognize these trends. So, to determine if Mahanagar Gas is a multi-bagger going forward, we suggest digging into other company fundamentals.

Like most businesses, Mahanagar Gas involves certain risks, and we have found 2 warning signs of which you should be aware.

Mahanagar Gas isn’t the only stock to generate high returns. If you want to see more, check out our free list of companies with high returns on equity with strong fundamentals.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.