Investors Met With Slowing Returns on Capital At Indian Metals and Ferro Alloys (NSE:IMFA)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. In light of that, when we looked at Indian Metals and Ferro Alloys (NSE:IMFA) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.17 = ₹3.4b ÷ (₹27b - ₹6.7b) (Based on the trailing twelve months to June 2023).

Therefore, Indian Metals and Ferro Alloys has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 14% generated by the Metals and Mining industry.

View 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?

Over the past five years, Indian Metals and Ferro Alloys' ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Indian Metals and Ferro Alloys in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

What We Can Learn From Indian Metals and Ferro Alloys' ROCE

In summary, Indian Metals and Ferro Alloys isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Yet to long term shareholders the stock has gifted them an incredible 262% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Indian Metals and Ferro Alloys does have some risks though, and we've spotted 2 warning signs for Indian Metals and Ferro Alloys that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.