SRM Contractors (NSE:SRM) Could Be Struggling To Allocate Capital

Simply Wall St · 04/16 00:22

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So while SRM Contractors (NSE:SRM) has a high ROCE right now, lets see what we can decipher from how returns are changing.

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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. The formula for this calculation on SRM Contractors is:

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

0.20 = ₹511m ÷ (₹3.4b - ₹855m) (Based on the trailing twelve months to December 2024).

Therefore, SRM Contractors has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Construction industry average of 16%.

Check out our latest analysis for SRM Contractors

roce
NSEI:SRM Return on Capital Employed April 16th 2025

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're interested in investigating SRM Contractors' past further, check out this free graph covering SRM Contractors' past earnings, revenue and cash flow.

What Does the ROCE Trend For SRM Contractors Tell Us?

When we looked at the ROCE trend at SRM Contractors, we didn't gain much confidence. To be more specific, while the ROCE is still high, it's fallen from 38% where it was three 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.

On a related note, SRM Contractors has decreased its current liabilities to 25% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

While returns have fallen for SRM Contractors in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 88% to shareholders over the last year. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you're still interested in SRM Contractors it's worth checking out our FREE intrinsic value approximation for SRM to see if it's trading at an attractive price in other respects.

SRM Contractors 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.