Returns On Capital At IRB Infrastructure Developers (NSE:IRB) Have Hit The Brakes

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at IRB Infrastructure Developers (NSE:IRB) and its ROCE trend, we weren't exactly thrilled.

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

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

0.059 = ₹24b ÷ (₹448b - ₹37b) (Based on the trailing twelve months to September 2024).

Therefore, IRB Infrastructure Developers has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 15%.

Check out 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're interested, you can view the analysts predictions in our free analyst report for IRB Infrastructure Developers .

What The Trend Of ROCE Can Tell Us

Things have been pretty stable at IRB Infrastructure Developers, with its capital employed and returns on that capital staying somewhat the same for the last five years. 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. With that in mind, unless investment picks up again in the future, we wouldn't expect IRB Infrastructure Developers to be a multi-bagger going forward.

On a side note, IRB Infrastructure Developers has done well to reduce current liabilities to 8.2% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line

In a nutshell, IRB Infrastructure Developers has been trudging along with the same returns from the same amount of capital over the last five years. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 366% 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.

On a final note, we found 2 warning signs for IRB Infrastructure Developers (1 makes us a bit uncomfortable) you should be aware of.

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.