There Are Reasons To Feel Uneasy About Rajshree Polypack's (NSE:RPPL) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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.

What is 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. 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)

0.092 = ₹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 14%.

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

How Are Returns Trending?

When we looked at the ROCE trend at Rajshree Polypack, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.2% from 29% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Rajshree Polypack's ROCE

In summary, Rajshree Polypack is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 135% gain to shareholders who have held over the last three years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Rajshree Polypack does have some risks, we noticed 4 warning signs (and 1 which can't be ignored) 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.

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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.