Return Trends At IRB Infrastructure Developers (NSE:IRB) Aren't Appealing

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for IRB Infrastructure Developers:

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

0.06 = ₹23b ÷ (₹435b - ₹48b) (Based on the trailing twelve months to September 2022).

Therefore, IRB Infrastructure Developers has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 10%.

See 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, you can check out the forecasts from the analysts covering IRB Infrastructure Developers here for free.

What The Trend Of ROCE Can Tell Us

Over the past five years, IRB Infrastructure Developers' ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at IRB Infrastructure Developers in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. This probably explains why IRB Infrastructure Developers is paying out 33% of its income to shareholders in the form of dividends. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

The Key Takeaway

We can conclude that in regards to IRB Infrastructure Developers' returns on capital employed and the trends, there isn't much change to report on. And with the stock having returned a mere 4.8% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for IRB Infrastructure Developers (of which 2 shouldn't be ignored!) that you should know about.

While IRB Infrastructure Developers 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. 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.