R.P.P. Infra Projects (NSE:RPPINFRA) May Have Issues Allocating Its Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at R.P.P. Infra Projects (NSE:RPPINFRA), it didn't seem to tick all of these boxes.

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. 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)

0.14 = ₹506m ÷ (₹6.2b - ₹2.6b) (Based on the trailing twelve months to September 2021).

Thus, R.P.P. Infra Projects has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.9% generated by the Construction industry.

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

The Trend Of ROCE

In terms of R.P.P. Infra Projects' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 14% from 19% five years ago. 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 42%. 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.

The Bottom Line

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. These growth trends haven't led to growth returns though, since the stock has fallen 56% 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.

One final note, you should learn about the 4 warning signs we've spotted with R.P.P. Infra Projects (including 2 which are concerning) .

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.