Investors Could Be Concerned With Udayshivakumar Infra's (NSE:USK) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after investigating Udayshivakumar Infra (NSE:USK), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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 Udayshivakumar Infra:

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

0.17 = ₹331m ÷ (₹3.1b - ₹1.2b) (Based on the trailing twelve months to December 2023).

So, Udayshivakumar Infra has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 14% generated by the Construction industry.

Check out our latest analysis for Udayshivakumar Infra

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Udayshivakumar Infra's past further, check out this free graph covering Udayshivakumar Infra's past earnings, revenue and cash flow.

So How Is Udayshivakumar Infra's ROCE Trending?

On the surface, the trend of ROCE at Udayshivakumar Infra doesn't inspire confidence. To be more specific, ROCE has fallen from 22% over the last three years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Udayshivakumar Infra is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 69% over the last year, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know more about Udayshivakumar Infra, we've spotted 3 warning signs, and 1 of them can't be ignored.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.