Udayshivakumar Infra's (NSE:USK) Returns On Capital Not Reflecting Well On The Business

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Udayshivakumar Infra (NSE:USK), we don't think it's current trends fit the mold of a multi-bagger.

Our free stock report includes 2 warning signs investors should be aware of before investing in Udayshivakumar Infra. Read for free now.

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. The formula for this calculation on Udayshivakumar Infra is:

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

0.06 = ₹139m ÷ (₹3.5b - ₹1.1b) (Based on the trailing twelve months to December 2024).

Thus, Udayshivakumar Infra has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 16%.

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.

The Trend Of ROCE

In terms of Udayshivakumar Infra's historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 22%, but since then they've fallen to 6.0%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Udayshivakumar Infra has done well to pay down its current liabilities to 33% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Udayshivakumar Infra's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Udayshivakumar Infra have fallen, meanwhile the business is employing more capital than it was four years ago. It should come as no surprise then that the stock has fallen 25% over the last year, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we've found 2 warning signs for Udayshivakumar Infra that we think you should be aware of.

While Udayshivakumar 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.