Slowing Rates Of Return At Rail Vikas Nigam (NSE:RVNL) Leave Little Room For Excitement

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. However, after investigating Rail Vikas Nigam (NSE:RVNL), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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 Rail Vikas Nigam:

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

0.084 = ₹12b ÷ (₹204b - ₹66b) (Based on the trailing twelve months to September 2024).

Thus, Rail Vikas Nigam has an ROCE of 8.4%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 15%.

See our latest analysis for Rail Vikas Nigam

In the above chart we have measured Rail Vikas Nigam's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Rail Vikas Nigam .

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at Rail Vikas Nigam. The company has employed 61% more capital in the last five years, and the returns on that capital have remained stable at 8.4%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 33% of total assets, this reported ROCE would probably be less than8.4% because total capital employed would be higher.The 8.4% ROCE could be even lower if current liabilities weren't 33% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

In Conclusion...

In conclusion, Rail Vikas Nigam has been investing more capital into the business, but returns on that capital haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 2,345% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Rail Vikas Nigam could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for RVNL on our platform quite valuable.

While Rail Vikas Nigam 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.