R.P.P. Infra Projects (NSE:RPPINFRA) Could Be Struggling To Allocate Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Having said that, from a first glance at R.P.P. Infra Projects (NSE:RPPINFRA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for R.P.P. Infra Projects, this is the formula:

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

0.036 = ₹145m ÷ (₹7.5b - ₹3.5b) (Based on the trailing twelve months to September 2022).

Therefore, R.P.P. Infra Projects has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Construction industry average of 10%.

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'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 past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at R.P.P. Infra Projects doesn't inspire confidence. To be more specific, ROCE has fallen from 22% 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.

On a separate but related note, it's important to know that R.P.P. Infra Projects has a current liabilities to total assets ratio of 46%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. 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

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. But since the stock has dived 82% 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.

If you want to know some of the risks facing R.P.P. Infra Projects we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.