Be Wary Of IRB Infrastructure Developers (NSE:IRB) And Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at IRB Infrastructure Developers (NSE:IRB), it didn't seem to tick all of these boxes.

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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. The formula for this calculation on IRB Infrastructure Developers is:

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

0.037 = ₹19b ÷ (₹539b - ₹37b) (Based on the trailing twelve months to June 2025).

Therefore, IRB Infrastructure Developers has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 15%.

View our latest analysis for IRB Infrastructure Developers

In the above chart we have measured IRB Infrastructure Developers' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for IRB Infrastructure Developers .

What Can We Tell From IRB Infrastructure Developers' ROCE Trend?

On the surface, the trend of ROCE at IRB Infrastructure Developers doesn't inspire confidence. To be more specific, ROCE has fallen from 8.1% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, IRB Infrastructure Developers has done well to pay down its current liabilities to 7.0% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

To conclude, we've found that IRB Infrastructure Developers is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 310% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 4 warning signs with IRB Infrastructure Developers (at least 2 which don't sit too well with us) , and understanding these would certainly be useful.

While IRB Infrastructure Developers may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.