Steel Strips Wheels (NSE:SSWL) Will Be Hoping To Turn Its Returns On Capital Around

What are the early trends we should look for to identify a stock that could 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. Having said that, from a first glance at Steel Strips Wheels (NSE:SSWL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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. Analysts use this formula to calculate it for Steel Strips Wheels:

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

0.095 = ₹1.3b ÷ (₹24b - ₹9.9b) (Based on the trailing twelve months to March 2021).

So, Steel Strips Wheels has an ROCE of 9.5%. Even though it's in line with the industry average of 8.9%, it's still a low return by itself.

See our latest analysis for Steel Strips Wheels

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

The Trend Of ROCE

In terms of Steel Strips Wheels' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.5% from 13% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a separate but related note, it's important to know that Steel Strips Wheels has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Steel Strips Wheels' ROCE

While returns have fallen for Steel Strips Wheels in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 78% over the last five years, it would appear that investors are upbeat about the future. 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.

Steel Strips Wheels does have some risks though, and we've spotted 2 warning signs for Steel Strips Wheels that you might be interested in.

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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