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

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at R.P.P. Infra Projects (NSE:RPPINFRA) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on R.P.P. Infra Projects is:

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

0.14 = ₹656m ÷ (₹8.4b - ₹3.7b) (Based on the trailing twelve months to December 2023).

So, R.P.P. Infra Projects has an ROCE of 14%. By itself that's a normal return on capital and it's in line with the industry's average returns of 14%.

View our latest analysis for R.P.P. Infra Projects

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'd like to look at how R.P.P. Infra Projects has performed in the past in other metrics, you can view this free graph of R.P.P. Infra Projects' past earnings, revenue and cash flow.

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

The trend of ROCE doesn't look fantastic because it's fallen from 23% five years ago, while the business's capital employed increased by 75%. Usually this isn't ideal, but given R.P.P. Infra Projects conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. R.P.P. Infra Projects probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

Another thing to note, R.P.P. Infra Projects has a high ratio of current liabilities to total assets of 44%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for R.P.P. Infra Projects. In light of this, the stock has only gained 28% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One more thing, we've spotted 1 warning sign facing R.P.P. Infra Projects that you might find interesting.

While R.P.P. Infra Projects 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.