Why The 24% Return On Capital At Lloyds Steels Industries (NSE:LSIL) Should Have Your Attention

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. And in light of that, the trends we're seeing at Lloyds Steels Industries' (NSE:LSIL) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Lloyds Steels Industries, this is the formula:

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

0.24 = ₹499m ÷ (₹3.7b - ₹1.7b) (Based on the trailing twelve months to March 2023).

Thus, Lloyds Steels Industries has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 16% earned by companies in a similar industry.

See our latest analysis for Lloyds Steels Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lloyds Steels Industries' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Lloyds Steels Industries, check out these free graphs here.

The Trend Of ROCE

We're delighted to see that Lloyds Steels Industries is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 24% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Lloyds Steels Industries is utilizing 83% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

On a related note, the company's ratio of current liabilities to total assets has decreased to 45%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

The Key Takeaway

In summary, it's great to see that Lloyds Steels Industries has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 3,579% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing: We've identified 3 warning signs with Lloyds Steels Industries (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.