What Should You Know About R M Drip and Sprinklers Systems Limited’s (NSE:RMDRIP) Return On Capital?

This analysis is intended to introduce important early concepts to people who are starting to invest and looking to gauge the potential return on investment in R M Drip and Sprinklers Systems Limited (NSE:RMDRIP).

If you purchase a RMDRIP share you are effectively becoming a partner with many other shareholders. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. Therefore, looking at how efficiently R M Drip and Sprinklers Systems is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.

View our latest analysis for R M Drip and Sprinklers Systems

R M Drip and Sprinklers Systems’s Return On Capital Employed

Choosing to invest in R M Drip and Sprinklers Systems comes at the cost of investing in another potentially favourable company. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if R M Drip and Sprinklers Systems is good at growing investor capital. RMDRIP’s ROCE is calculated below:

ROCE Calculation for RMDRIP

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = ₹24m ÷ (₹325m – ₹106m) = 11%

As you can see, RMDRIP earned ₹10.9 from every ₹100 you invested over the previous twelve months. Comparing this to a healthy 15% benchmark shows R M Drip and Sprinklers Systems is currently unable to return a desired amount to owners for the use of their capital, which isn’t favourable for investors who have forgone other potentially solid companies.

NSEI:RMDRIP Last Perf November 8th 18
NSEI:RMDRIP Last Perf November 8th 18

What is causing this?

R M Drip and Sprinklers Systems’s relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment R M Drip and Sprinklers Systems is in an adverse position, but this can change if these factors improve. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Three years ago, RMDRIP’s ROCE was 2.7%, which means the company’s capital returns have improved. Similarly, the movement in the earnings variable shows a jump from ₹864k to ₹24m whilst the amount of capital employed also grew but by a proportionally lesser volume, which suggests the larger ROCE is due to a growth in earnings relative to capital requirements.

Next Steps

ROCE for RMDRIP investors is below the desired level at the moment, however, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. It is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as future prospects and management ability to determine whether there is potential for return by focusing our attention elsewhere. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate RMDRIP or move on to other alternatives.

  1. Future Outlook: What are well-informed industry analysts predicting for RMDRIP’s future growth? Take a look at our free research report of analyst consensus for RMDRIP’s outlook.
  2. Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for R M Drip and Sprinklers Systems’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.