Rajshree Polypack (NSE:RPPL) Is Reinvesting At Lower Rates Of Return

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Rajshree Polypack (NSE:RPPL), we don't think it's current trends fit the mold of a multi-bagger.

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

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

0.092 = ₹105m ÷ (₹1.7b - ₹526m) (Based on the trailing twelve months to March 2021).

So, Rajshree Polypack has an ROCE of 9.2%. Ultimately, that's a low return and it under-performs the Packaging industry average of 12%.

Check out 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 want to delve into the historical earnings, revenue and cash flow of Rajshree Polypack, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of Rajshree Polypack's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 29%, but since then they've fallen to 9.2%. However it looks like Rajshree Polypack might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Rajshree Polypack's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 80% over the last three years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Rajshree Polypack does have some risks, we noticed 4 warning signs (and 1 which is a bit concerning) we think 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.