Is Oil India (NSE: OIL) likely to make a difference?

There are a few key trends to look for if we are to identify the next multi-bagger. In a perfect world, we would like to see a business invest more capital in their business, and ideally the returns from that capital increase as well. This shows us that it is a composing machine, capable of continually reinvesting its profits into the business and generating higher returns. Having said that, from a first glance at Oil India (NSE: OIL) We’re not jumping off our chairs to see how the returns move, but take a closer look.

What is Return on Capital Employed (ROCE)?

If you’ve never worked with ROCE before, it measures the “ return ” (profit before tax) that a business generates from the capital employed in its business. Analysts use this formula to calculate it for Oil India:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.012 = ₹ 5.6bn (₹ 502bn – ₹ 52bn) (Based on the last twelve months up to September 2020).

So, Oil India has a ROCE of 1.2%. In absolute terms, that’s a low return and it also byproducts the oil and gas industry average of 5.7%.

See our latest analysis for Oil India

In the chart above, we measured Oil India’s past ROCE against its past performance, but the future is arguably more important. If you want to see what analysts are forecasting for the future, you should check out our free report for Oil India.

What are the return trends?

When it comes to Oil India’s historic ROCE moves, the trend is not great. To be more precise, ROCE has increased from 7.7% over the past five years. And since incomes have fallen while employing more capital, we would be cautious. This could mean that the company loses its competitive advantage or market share, because if more money is invested in companies, it actually produces a lower return – “less bang for the buck” per se.

Our take on Oil India’s ROCE

In summary, we are somewhat concerned about Oil India’s diminishing returns on increasing amounts of capital. And the stock has held steady for the past five years, so investors don’t seem overly impressed either. With underlying trends not being great in these areas, we would consider looking elsewhere.

One more thing: we have identified 3 warning signs with Oil India (at least 1, which is significant), and understanding them would certainly help.

While Oil India does not currently achieve the highest returns, we have compiled a list of companies that are currently generating over 25% return on equity. Check it out free list here.

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