R.P.P. Infra Projects' (NSE:RPPINFRA) Returns On Capital Not Reflecting Well On The Business

What trends should we look for it we want to identify stocks that can 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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.

What is 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)

0.12 = ₹411m ÷ (₹6.3b - ₹2.8b) (Based on the trailing twelve months to March 2021).

Therefore, 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 9.7% it's much better.

See 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.

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because R.P.P. Infra Projects' ROCE has reduced by 45% over the last five years, while the business employed 74% more capital. 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. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with R.P.P. Infra Projects' earnings and if they change as a result from the capital raise.

On a side note, R.P.P. Infra Projects' current liabilities are still rather high at 45% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On R.P.P. Infra Projects' ROCE

In summary, we're somewhat concerned by R.P.P. Infra Projects' diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 59% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

R.P.P. Infra Projects does have some risks, we noticed 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While R.P.P. Infra Projects may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

If you’re looking to trade R.P.P. Infra Projects, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.