To find a multi-bagger stock, what underlying trends should we look for in a company? A common approach is to try to find a company with Return on capital employed (ROCE) which is increasing, in line with growth amount capital employed. If you see this, it usually means it’s a company with a great business model and lots of profitable reinvestment opportunities. However, after briefly looking at the numbers, we don’t think RPP Infra projects (NSE:RPPINFRA) has the makings of a multi-bagger in the future, but let’s see why.
Return on capital employed (ROCE): what is it?
For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. The formula for this calculation on RPP Infra projects is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.15 = ₹527m ÷ (₹6.2b – ₹2.6b) (Based on the last twelve months to December 2021).
So, RPP Infra Projects has a ROCE of 15%. In itself, this is a standard return, but it is much better than the 10% generated by the construction industry.
See our latest analysis for RPP Infra projects
Historical performance is a great starting point when researching a stock. So you can see above the RPP Infra Projects ROCE gauge compared to its past returns. If you want to investigate more about the past of RPP Infra Projects, check out this free chart of past profits, revenue and cash flow.
What can we say about the ROCE trend of RPP Infra Projects?
On the surface, the ROCE trend at RPP Infra Projects does not inspire confidence. To be more specific, ROCE has fallen by 20% over the past five years. Although, given that revenue and the amount of assets used in the business have increased, it could suggest that the business is investing in growth and that the additional capital has resulted in a short-term reduction in ROCE. And if the capital increase generates additional returns, the company, and therefore the shareholders, will benefit in the long term.
Furthermore, the current liabilities of RPP Infra Projects are still quite high at 42% of total assets. This effectively means that suppliers (or short-term creditors) finance a large part of the business, so just be aware that this may introduce some elements of risk. Ideally, we would like this to decrease, as this would mean fewer risky bonds.
The Key Takeaway
Even though capital returns have fallen in the short term, we find it promising that both revenue and capital employed have increased for RPP Infra Projects. But since the stock has plunged 75% in the past five years, there could be other drivers influencing the company’s outlook. Either way, reinvesting can pay off in the long run, so we think savvy investors may want to dig deeper into this stock.
If you want to know more about RPP Infra Projects, we have spotted 4 warning signs, and 2 of them are a little worrying.
For those who like to invest in solid companies, look at this free list of companies with strong balance sheets and high returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.