To find a multi-bagger stock, what are the underlying trends to look for in a business? First of all, we want to see a return on capital employed (ROCE) which increases, and on the other hand, a based capital employed. This shows us that it is a compounding machine, capable of continually reinvesting its profits into the business and generating higher returns. However, after investigating NTPC (NSE: NTPC), we don’t think the current trends fit the mold of a multi-bagger.
Return on capital employed (ROCE): what is it?
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. To calculate this metric for NTPC, here is the formula:
Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.077 = ₹ 244b ÷ (₹ 4.0t – ₹ 788b) (Based on the last twelve months up to December 2020).
Therefore, NTPC has a ROCE of 7.7%. In absolute terms, this is a low return, but it sits around the renewable energy industry average of 7.4%.
Check out our latest review for NTPC
Above you can see how NTPC’s current ROCE compares to its past returns on capital, but you can’t say more about the past. If you are interested, you can view analyst forecasts in our free analyst forecast report for the company.
What are the return trends?
Returns on capital have not changed much for NTPC in recent years. The company has steadily gained 7.7% over the past five years, and the capital employed within the company has increased by 70% during this period. This low ROCE does not inspire confidence at the moment, and with the increase in capital employed, it is evident that the company is not deploying the funds in high return investments.
What we can learn from NTPC’s ROCE
In short, NTPC simply reinvested the capital and generated the same low rate of return as before. Unsurprisingly, the stock has only gained 6.5% over the past five years, potentially indicating that investors are taking this into account going forward. Therefore, if you are looking for a multi-bagger, we suggest that you consider other options.
NTPC has some risks, we noticed 2 warning signs (and 1 which makes us a little uncomfortable) we think you should know.
While NTPC does not currently achieve the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
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