RPSG Ventures (NSE:RPSGVENT) Has Some Way To Go To Become A Multi-Bagger

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at RPSG Ventures (NSE:RPSGVENT), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for RPSG Ventures, this is the formula:

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

0.073 = ₹3.5b ÷ (₹61b - ₹13b) (Based on the trailing twelve months to December 2020).

Thus, RPSG Ventures has an ROCE of 7.3%. Ultimately, that's a low return and it under-performs the IT industry average of 11%.

View our latest analysis for RPSG Ventures

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 RPSG Ventures, check out these free graphs here.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at RPSG Ventures. The company has employed 22% more capital in the last two years, and the returns on that capital have remained stable at 7.3%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On RPSG Ventures' ROCE

In conclusion, RPSG Ventures has been investing more capital into the business, but returns on that capital haven't increased. Yet to long term shareholders the stock has gifted them an incredible 220% return in the last year, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing, we've spotted 1 warning sign facing RPSG Ventures that you might find interesting.

While RPSG Ventures isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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