Our Take On The Returns On Capital At Rajshree Polypack (NSE:RPPL)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Although, when we looked at Rajshree Polypack (NSE:RPPL), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Rajshree Polypack:

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

0.067 = ₹72m ÷ (₹1.3b - ₹234m) (Based on the trailing twelve months to September 2020).

So, Rajshree Polypack has an ROCE of 6.7%. Ultimately, that's a low return and it under-performs the Packaging industry average of 12%.

View our latest analysis for Rajshree Polypack

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Rajshree Polypack's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Rajshree Polypack's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 20%, but since then they've fallen to 6.7%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Key Takeaway

In summary, we're somewhat concerned by Rajshree Polypack's diminishing returns on increasing amounts of capital. And, the stock has remained flat over the last year, so investors don't seem too impressed either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

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

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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