Here's What's Concerning About R.P.P. Infra Projects' (NSE:RPPINFRA) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating R.P.P. Infra Projects (NSE:RPPINFRA), 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. Analysts use this formula to calculate it for R.P.P. Infra Projects:

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

0.064 = ₹236m ÷ (₹7.6b - ₹3.9b) (Based on the trailing twelve months to June 2022).

Therefore, R.P.P. Infra Projects has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 11%.

Check out our latest analysis for R.P.P. Infra Projects

Historical performance is a great place to start when researching a stock so above you can see the gauge for R.P.P. Infra Projects' ROCE against it's prior returns. If you're interested in investigating R.P.P. Infra Projects' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For R.P.P. Infra Projects Tell Us?

In terms of R.P.P. Infra Projects' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 21% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Another thing to note, R.P.P. Infra Projects has a high ratio of current liabilities to total assets of 51%. 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.

The Bottom Line On R.P.P. Infra Projects' ROCE

While returns have fallen for R.P.P. Infra Projects in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. But since the stock has dived 79% in the last five years, there could be other drivers that are influencing the business' outlook. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

One final note, you should learn about the 4 warning signs we've spotted with R.P.P. Infra Projects (including 2 which don't sit too well with us) .

While R.P.P. Infra 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.