Investors Could Be Concerned With SPML Infra's (NSE:SPMLINFRA) Returns On Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at SPML Infra (NSE:SPMLINFRA), we've spotted some signs that it could be struggling, so let's investigate.

What Is 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)

0.0045 = ₹51m ÷ (₹26b - ₹15b) (Based on the trailing twelve months to September 2022).

Therefore, SPML Infra has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 12%.

Check out our latest analysis for SPML Infra

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

The Trend Of ROCE

In terms of SPML Infra's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 15% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on SPML Infra becoming one if things continue as they have.

On a side note, SPML Infra's current liabilities are still rather high at 57% 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 Key Takeaway

In summary, it's unfortunate that SPML Infra is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 78% during the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 5 warning signs with SPML Infra (at least 2 which are concerning) , and understanding them would certainly be useful.

While SPML Infra 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.