Has Simplex Infrastructures (NSE:SIMPLEXINF) Got What It Takes To Become A Multi-Bagger?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Simplex Infrastructures (NSE:SIMPLEXINF), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Simplex Infrastructures:

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

0.20 = ₹4.9b ÷ (₹97b - ₹72b) (Based on the trailing twelve months to December 2019).

Therefore, Simplex Infrastructures has an ROCE of 20%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 13% it's much better.

View our latest analysis for Simplex Infrastructures

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, revenue and cash flow of Simplex Infrastructures, check out these free graphs here.

How Are Returns Trending?

Over the past five years, Simplex Infrastructures' ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Simplex Infrastructures to be a multi-bagger going forward.

Another thing to note, Simplex Infrastructures has a high ratio of current liabilities to total assets of 75%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

In a nutshell, Simplex Infrastructures has been trudging along with the same returns from the same amount of capital over the last five years. Moreover, since the stock has crumbled 92% over the last five years, it appears investors are expecting the worst. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing: We've identified 7 warning signs with Simplex Infrastructures (at least 2 which are a bit unpleasant) , and understanding these would certainly be useful.

While Simplex Infrastructures 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. 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.
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