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

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating IRB Infrastructure Developers (NSE:IRB), we don't think it's current trends fit the mold of a multi-bagger.

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. To calculate this metric for IRB Infrastructure Developers, this is the formula:

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

0.057 = ₹23b ÷ (₹449b - ₹39b) (Based on the trailing twelve months to March 2024).

Therefore, IRB Infrastructure Developers has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 15%.

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 to see what analysts are forecasting going forward, you should check out our free analyst report for IRB Infrastructure Developers .

What Does the ROCE Trend For IRB Infrastructure Developers Tell Us?

There hasn't been much to report for IRB Infrastructure Developers' returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if IRB Infrastructure Developers doesn't end up being a multi-bagger in a few years time. With fewer investment opportunities, it makes sense that IRB Infrastructure Developers has been paying out a decent 34% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

The Bottom Line

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. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 621% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

IRB Infrastructure Developers does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...

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. 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.