We Like These Underlying Return On Capital Trends At Rail Vikas Nigam (NSE:RVNL)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Rail Vikas Nigam (NSE:RVNL) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on Rail Vikas Nigam is:

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

0.093 = ₹13b ÷ (₹184b - ₹44b) (Based on the trailing twelve months to June 2023).

Therefore, Rail Vikas Nigam has an ROCE of 9.3%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 12%.

See our latest analysis for Rail Vikas Nigam

Historical performance is a great place to start when researching a stock so above you can see the gauge for Rail Vikas Nigam's ROCE against it's prior returns. If you'd like to look at how Rail Vikas Nigam has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Rail Vikas Nigam's ROCE Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 9.3%. Basically the business is earning more per dollar of capital invested and in addition to that, 112% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line

In summary, it's great to see that Rail Vikas Nigam can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 543% total return over the last three years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One final note, you should learn about the 2 warning signs we've spotted with Rail Vikas Nigam (including 1 which is concerning) .

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.