[ad_1]
Did you know that there are some financial indicators that can give you a clue of who has the most potential? In a perfect world, we would like to see companies invest more in their businesses, and ideally the returns on that capital increase. If you see this, it usually means that it is a company with a good business model and a very profitable reinvestment opportunity. In light of that, when we look at Tathagata energy (NSE:TATAPOWER) and its ROCE trend, we are definitely not excited.
What is Return On Capital Employed (ROCE)?
For those who are not sure what ROCE is, it measures the amount of pre-tax profit a company can generate from the capital employed in its business. To calculate this metric for Tata Power, here is the formula:
Return on Capital Employed = Earnings Before Interest and Taxes (EBIT) ÷ (Total Assets – Current Liabilities)
0.051 = ₹38b ÷ (₹1.1t – ₹387b) (based on twelve month tracking to June 2022).
therefore, Tata Power has a ROCE of 5.1%. In the end, that’s a low return and it runs against the Electric Utilities industry average of 8.3%.
See our latest analysis for Tata Power
In the chart above we have measured Tata Power’s past ROCE against its past performance, but the future is more important. If you want to see what analysts predict going forward, you should check out our Free Report for Tata Power.
What the trend of ROCE can tell us
In terms of Tata Power’s historical ROCE performance, the trend is not great. To be more specific, ROCE has decreased from 8.1% in the last five years. Although, both the income and the number of assets employed in the business have increased, it can indicate that the company is investing in growth, and additional capital has caused a short-term decrease in ROCE. And if the increased capital generates additional returns, the business, and thus the shareholders, will benefit in the long run.
Summary…
Although the return on capital has declined in the short term, we see it as positive that revenue and capital employed both increased for Tata Power. And long-term investors will have to be optimistic going forward because the stock has returned a whopping 217% to shareholders over the past five years. Therefore, if these growth trends continue, we expect the stock to move forward.
Since almost every company faces some risks, it is worth knowing what they are, and we found out 2 warning signs for Tata Power (That 1 is about!) that you should know about.
If you want to find a solid company that pays well, check this out Free A list of companies with good balance sheets and impressive returns on shares.
Valuation is complicated, but we help make it simple.
Find out whether Tathagata energy May be over or under by checking our comprehensive analysis, which includes Fair value estimates, risks and warnings, dividends, insider transactions and financial health.
See free analysis
Have an opinion on this article? Worried about content? Can be contacted with us directly. Alternatively, email the editorial team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methods and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any securities, and does not take into account your objectives, or your financial situation. We aim to bring you long-term focused analysis based on fundamental data. Please note that our analysis may not factor in company postings that are sensitive to the latest price or quality materials. Only Wall St has no position in any of the stocks mentioned.
[ad_2]
Source link
