Returns On Capital Signal Tricky Times Ahead For Rachana Infrastructure (NSE:RILINFRA)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Rachana Infrastructure (NSE:RILINFRA), 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 Rachana Infrastructure, this is the formula:

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

0.045 = ₹47m ÷ (₹1.3b - ₹215m) (Based on the trailing twelve months to March 2024).

Therefore, Rachana Infrastructure has an ROCE of 4.5%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 16%.

See our latest analysis for Rachana Infrastructure

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Rachana Infrastructure's past further, check out this free graph covering Rachana Infrastructure's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Rachana Infrastructure's historical ROCE movements, the trend isn't fantastic. Around three years ago the returns on capital were 9.7%, but since then they've fallen to 4.5%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Rachana Infrastructure's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Rachana Infrastructure is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 49% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, Rachana Infrastructure does come with some risks, and we've found 1 warning sign that you should be aware of.

While Rachana Infrastructure 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.