What Can The Trends At RattanIndia Power (NSE:RTNPOWER) Tell Us About Their Returns?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at RattanIndia Power (NSE:RTNPOWER) and its trend of ROCE, we really liked what we saw.

What is 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. To calculate this metric for RattanIndia Power, this is the formula:

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

0.0044 = ₹514m ÷ (₹191b - ₹73b) (Based on the trailing twelve months to March 2020).

So, RattanIndia Power has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 7.7%.

View our latest analysis for RattanIndia Power

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 RattanIndia Power, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

It's great to see that RattanIndia Power has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 0.4% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 27%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 38% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From RattanIndia Power's ROCE

In a nutshell, we're pleased to see that RattanIndia Power has been able to generate higher returns from less capital. And since the stock has dived 71% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

On a final note, we found 4 warning signs for RattanIndia Power (2 make us uncomfortable) you should be aware of.

While RattanIndia Power 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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