We Like These Underlying Return On Capital Trends At Ruchi Infrastructure (NSE:RUCHINFRA)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 when we looked at Ruchi Infrastructure (NSE:RUCHINFRA) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.025 = ₹67m ÷ (₹3.2b - ₹506m) (Based on the trailing twelve months to June 2023).

Therefore, Ruchi Infrastructure has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 5.1%.

Check out 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.

The Trend Of ROCE

It's great to see that Ruchi Infrastructure has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 2.5% on their capital employed. In regards to capital employed, Ruchi Infrastructure is using 28% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

What We Can Learn From Ruchi Infrastructure's ROCE

In the end, Ruchi Infrastructure has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has returned a solid 66% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Ruchi Infrastructure can keep these trends up, it could have a bright future ahead.

If you'd like to know more about Ruchi Infrastructure, we've spotted 4 warning signs, and 1 of them can't be ignored.

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.