Our Take On The Returns On Capital At R.P.P. Infra Projects (NSE:RPPINFRA)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. 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.

What is Return On Capital Employed (ROCE)?

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. 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)

0.12 = ₹391m ÷ (₹4.9b - ₹1.7b) (Based on the trailing twelve months to September 2020).

Thus, R.P.P. Infra Projects has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 9.5% it's much better.

View 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 want to delve into the historical earnings, revenue and cash flow of R.P.P. Infra Projects, check out these free graphs here.

What Can We Tell From R.P.P. Infra Projects' ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 21% five years ago, while the business's capital employed increased by 65%. 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. It's unlikely that all of the funds raised have been put to work yet, so as a consequence R.P.P. Infra Projects might not have received a full period of earnings contribution from it.

On a related note, R.P.P. Infra Projects has decreased its current liabilities to 35% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

We're a bit apprehensive about R.P.P. Infra Projects because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 38% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 3 warning signs with R.P.P. Infra Projects (at least 1 which is a bit concerning) , and understanding them would certainly be useful.

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