The Returns At Steel Strips Wheels (NSE:SSWL) Provide Us With Signs Of What's To Come

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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after briefly looking over the numbers, we don't think Steel Strips Wheels (NSE:SSWL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Steel Strips Wheels, this is the formula:

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

0.063 = ₹813m ÷ (₹21b - ₹8.2b) (Based on the trailing twelve months to December 2020).

So, Steel Strips Wheels has an ROCE of 6.3%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 8.6%.

Check out our latest analysis for Steel Strips Wheels

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'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.

So How Is Steel Strips Wheels' ROCE Trending?

On the surface, the trend of ROCE at Steel Strips Wheels doesn't inspire confidence. To be more specific, ROCE has fallen from 14% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Steel Strips Wheels' ROCE

In summary, we're somewhat concerned by Steel Strips Wheels' diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 109% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know about the risks facing Steel Strips Wheels, we've discovered 2 warning signs that you should be aware of.

While Steel Strips Wheels 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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This article by Simply Wall St is general in nature. 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.
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