RKEC Projects (NSE:RKEC) May Have Issues Allocating Its Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating RKEC Projects (NSE:RKEC), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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 RKEC Projects, this is the formula:

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

0.19 = ₹255m ÷ (₹3.8b - ₹2.4b) (Based on the trailing twelve months to March 2021).

Therefore, RKEC Projects has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 9.7% generated by the Construction industry.

See our latest analysis for RKEC Projects

Historical performance is a great place to start when researching a stock so above you can see the gauge for RKEC Projects' ROCE against it's prior returns. If you'd like to look at how RKEC Projects has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From RKEC Projects' ROCE Trend?

In terms of RKEC Projects' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 34% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Another thing to note, RKEC Projects has a high ratio of current liabilities to total assets of 64%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

We're a bit apprehensive about RKEC Projects because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 16% from where it was three years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 4 warning signs for RKEC Projects (2 are a bit unpleasant) you should be aware of.

While RKEC Projects may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.
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