Returns On Capital At IRB Infrastructure Developers (NSE:IRB) Have Stalled

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at IRB Infrastructure Developers (NSE:IRB), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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 December 2022).

Thus, 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 12%.

See our latest analysis for IRB Infrastructure Developers

Above you can see how the current ROCE for IRB Infrastructure Developers compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering IRB Infrastructure Developers here for free.

SWOT Analysis for IRB Infrastructure Developers

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. 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.

The Bottom Line

In summary, IRB Infrastructure Developers isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Unsurprisingly, the stock has only gained 30% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

On a final note, we found 3 warning signs for IRB Infrastructure Developers (1 shouldn't be ignored) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.