R.P.P. Infra Projects (NSE:RPPINFRA) Is Reinvesting At Lower Rates Of Return

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Although, when we looked at R.P.P. Infra Projects (NSE:RPPINFRA), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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)

0.083 = ₹331m ÷ (₹7.8b - ₹3.8b) (Based on the trailing twelve months to June 2023).

Thus, R.P.P. Infra Projects has an ROCE of 8.3%. Ultimately, that's a low return and it under-performs the Construction industry average of 13%.

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

So How Is R.P.P. Infra Projects' ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 26% five years ago, while capital employed has grown 72%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. 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.

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 49%, 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.

Our Take 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. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we found 3 warning signs for R.P.P. Infra Projects (1 is potentially serious) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.