Indian Metals and Ferro Alloys (NSE:IMFA) Is Experiencing Growth In Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. With that in mind, we've noticed some promising trends at Indian Metals and Ferro Alloys (NSE:IMFA) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Indian Metals and Ferro Alloys:

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

0.19 = ₹4.2b ÷ (₹28b - ₹6.4b) (Based on the trailing twelve months to September 2023).

So, Indian Metals and Ferro Alloys has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 14% it's much better.

Check out our latest analysis for Indian Metals and Ferro Alloys

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

What Does the ROCE Trend For Indian Metals and Ferro Alloys Tell Us?

Indian Metals and Ferro Alloys has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 37% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line On Indian Metals and Ferro Alloys' ROCE

To bring it all together, Indian Metals and Ferro Alloys has done well to increase the returns it's generating from its capital employed. And a remarkable 477% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Indian Metals and Ferro Alloys can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 1 warning sign facing Indian Metals and Ferro Alloys that you might find interesting.

While Indian Metals and Ferro Alloys may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.