We're Watching These Trends At SPML Infra (NSE:SPMLINFRA)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think SPML Infra (NSE:SPMLINFRA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for SPML Infra, this is the formula:

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

0.059 = ₹727m ÷ (₹30b - ₹18b) (Based on the trailing twelve months to March 2020).

So, SPML Infra has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Construction industry average of 8.3%.

Check out our latest analysis for SPML Infra

Historical performance is a great place to start when researching a stock so above you can see the gauge for SPML Infra's ROCE against it's prior returns. If you'd like to look at how SPML Infra has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of SPML Infra's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 16% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, SPML Infra has decreased its current liabilities to 59% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 59% is still pretty high, so those risks are still somewhat prevalent.

Our Take On SPML Infra's ROCE

We're a bit apprehensive about SPML Infra because despite more capital being deployed in the business, returns on that capital and sales have both fallen. We expect this has contributed to the stock plummeting 88% during the last five years. Unless these trends revert to a more positive trajectory, we would look elsewhere.

SPML Infra does have some risks, we noticed 4 warning signs (and 2 which are potentially serious) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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