Investors Could Be Concerned With Rajshree Polypack's (NSE:RPPL) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Rajshree Polypack (NSE:RPPL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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 Rajshree Polypack, this is the formula:

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

0.11 = ₹187m ÷ (₹2.4b - ₹780m) (Based on the trailing twelve months to December 2022).

Therefore, Rajshree Polypack has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Packaging industry average of 13%.

View our latest analysis for Rajshree Polypack

Historical performance is a great place to start when researching a stock so above you can see the gauge for Rajshree Polypack's ROCE against it's prior returns. If you'd like to look at how Rajshree Polypack 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 Rajshree Polypack's ROCE Trend?

In terms of Rajshree Polypack's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 24% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Rajshree Polypack. And long term investors must be optimistic going forward because the stock has returned a huge 171% to shareholders in the last three years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Rajshree Polypack (of which 1 is a bit unpleasant!) that you should know about.

While Rajshree Polypack 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.