Here's What To Make Of RPSG Ventures' (NSE:RPSGVENT) Decelerating Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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 investigating RPSG Ventures (NSE:RPSGVENT), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for RPSG Ventures:

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

0.054 = ₹5.5b ÷ (₹128b - ₹28b) (Based on the trailing twelve months to December 2022).

So, RPSG Ventures has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 12%.

See our latest analysis for RPSG Ventures

Historical performance is a great place to start when researching a stock so above you can see the gauge for RPSG Ventures' ROCE against it's prior returns. If you're interested in investigating RPSG Ventures' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There are better returns on capital out there than what we're seeing at RPSG Ventures. The company has employed 160% more capital in the last four years, and the returns on that capital have remained stable at 5.4%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line On RPSG Ventures' ROCE

Long story short, while RPSG Ventures has been reinvesting its capital, the returns that it's generating haven't increased. Yet to long term shareholders the stock has gifted them an incredible 274% return in the last three years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

RPSG Ventures does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

While RPSG Ventures may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.