Returns On Capital Signal Tricky Times Ahead For REDTAPE (NSE:REDTAPE)

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, while the ROCE is currently high for REDTAPE (NSE:REDTAPE), we aren't jumping out of our chairs because returns are decreasing.

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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. Analysts use this formula to calculate it for REDTAPE:

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

0.23 = ₹2.6b ÷ (₹19b - ₹7.4b) (Based on the trailing twelve months to December 2024).

So, REDTAPE has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 16%.

View our latest analysis for REDTAPE

Historical performance is a great place to start when researching a stock so above you can see the gauge for REDTAPE's ROCE against it's prior returns. If you'd like to look at how REDTAPE has performed in the past in other metrics, you can view this free graph of REDTAPE's past earnings, revenue and cash flow.

What Does the ROCE Trend For REDTAPE Tell Us?

On the surface, the trend of ROCE at REDTAPE doesn't inspire confidence. To be more specific, while the ROCE is still high, it's fallen from 29% where it was two years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

In Conclusion...

While returns have fallen for REDTAPE in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, total returns to shareholders over the last year have been flat, which could indicate these growth trends potentially aren't accounted for yet by investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a separate note, we've found 1 warning sign for REDTAPE you'll probably want to know about.

REDTAPE is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.