The Trend Of High Returns At RKEC Projects (NSE:RKEC) Has Us Very Interested

Did you know there are some financial metrics that can provide clues of a potential 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. Speaking of which, we noticed some great changes in RKEC Projects' (NSE:RKEC) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on RKEC Projects is:

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

0.49 = ₹586m ÷ (₹3.3b - ₹2.1b) (Based on the trailing twelve months to March 2020).

Thus, RKEC Projects has an ROCE of 49%. In absolute terms that's a great return and it's even better than the Construction industry average of 8.4%.

Check out 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.

The Trend Of ROCE

We like the trends that we're seeing from RKEC Projects. The data shows that returns on capital have increased substantially over the last five years to 49%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 419%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a separate but related note, it's important to know that RKEC Projects has a current liabilities to total assets ratio of 64%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From RKEC Projects' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what RKEC Projects has. And since the stock has fallen 49% over the last three years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

If you'd like to know about the risks facing RKEC Projects, we've discovered 6 warning signs that you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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