Ruchi Infrastructure (NSE:RUCHINFRA) Could Be Struggling To Allocate Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Ruchi Infrastructure (NSE:RUCHINFRA), the trends above didn't look too great.

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. To calculate this metric for Ruchi Infrastructure, this is the formula:

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

0.04 = ₹100m ÷ (₹3.7b - ₹1.2b) (Based on the trailing twelve months to December 2021).

Thus, Ruchi Infrastructure has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 12%.

See 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 want to delve into the historical earnings, revenue and cash flow of Ruchi Infrastructure, check out these free graphs here.

How Are Returns Trending?

The trend of returns that Ruchi Infrastructure is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 4.0% we see today. In addition to that, Ruchi Infrastructure is now employing 34% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a related note, Ruchi Infrastructure has decreased its current liabilities to 32% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Ruchi Infrastructure's ROCE

To see Ruchi Infrastructure reducing the capital employed in the business in tandem with diminishing returns, is concerning. Since the stock has skyrocketed 159% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing to note, we've identified 2 warning signs with Ruchi Infrastructure and understanding them should be part of your investment process.

While Ruchi Infrastructure 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.