Returns At Ruchi Infrastructure (NSE:RUCHINFRA) Are On The Way Up

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Ruchi Infrastructure (NSE:RUCHINFRA) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on Ruchi Infrastructure is:

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

0.021 = ₹58m ÷ (₹3.2b - ₹380m) (Based on the trailing twelve months to December 2023).

So, Ruchi Infrastructure has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 7.0%.

View our latest analysis for Ruchi Infrastructure

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

The Trend Of ROCE

Shareholders will be relieved that Ruchi Infrastructure has broken into profitability. The company now earns 2.1% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 12%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Key Takeaway

To bring it all together, Ruchi Infrastructure has done well to increase the returns it's generating from its capital employed. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we found 5 warning signs for Ruchi Infrastructure (1 is concerning) you should be aware of.

While Ruchi Infrastructure 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.