Returns At RattanIndia Power (NSE:RTNPOWER) Are On The Way Up

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at RattanIndia Power (NSE:RTNPOWER) so let's look a bit deeper.

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. Analysts use this formula to calculate it for RattanIndia Power:

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

0.054 = ₹4.3b ÷ (₹181b - ₹101b) (Based on the trailing twelve months to December 2021).

Therefore, RattanIndia Power has an ROCE of 5.4%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 6.9%.

Check out our latest analysis for RattanIndia Power

Historical performance is a great place to start when researching a stock so above you can see the gauge for RattanIndia Power's ROCE against it's prior returns. If you're interested in investigating RattanIndia Power's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

RattanIndia Power has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 76% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, RattanIndia Power appears to been achieving more with less, since the business is using 54% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 56% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

Our Take On RattanIndia Power's ROCE

In a nutshell, we're pleased to see that RattanIndia Power has been able to generate higher returns from less capital. And since the stock has fallen 27% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing: We've identified 2 warning signs with RattanIndia Power (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

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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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.