Rudrabhishek Enterprises (NSE:REPL) May Have Issues Allocating Its Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 briefly looking over the numbers, we don't think Rudrabhishek Enterprises (NSE:REPL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Rudrabhishek Enterprises, this is the formula:

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

0.18 = ₹153m ÷ (₹917m - ₹79m) (Based on the trailing twelve months to December 2020).

Therefore, Rudrabhishek Enterprises has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Professional Services industry average of 8.4% it's much better.

View our latest analysis for Rudrabhishek Enterprises

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

What Can We Tell From Rudrabhishek Enterprises' ROCE Trend?

On the surface, the trend of ROCE at Rudrabhishek Enterprises doesn't inspire confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 18%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

In summary, we're somewhat concerned by Rudrabhishek Enterprises' diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 663% over the last year, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we've found 1 warning sign for Rudrabhishek Enterprises that we think you should be aware of.

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This article by Simply Wall St is general in nature. 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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