Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at SPML Infra (NSE:SPMLINFRA), 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 SPML Infra:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0014 = ₹16m ÷ (₹28b - ₹17b) (Based on the trailing twelve months to March 2022).
Therefore, SPML Infra has an ROCE of 0.1%. Ultimately, that's a low return and it under-performs the Construction industry average of 12%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for SPML Infra's ROCE against it's prior returns. If you're interested in investigating SPML Infra's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From SPML Infra's ROCE Trend?
We weren't thrilled with the trend because SPML Infra's ROCE has reduced by 99% over the last five years, while the business employed 22% more capital. That being said, SPML Infra raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence SPML Infra might not have received a full period of earnings contribution from it.
Another thing to note, SPML Infra has a high ratio of current liabilities to total assets of 60%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for SPML Infra. However, despite the promising trends, the stock has fallen 67% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
SPML Infra does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is significant...
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.
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