Under The Bonnet, Indian Metals and Ferro Alloys' (NSE:IMFA) Returns Look Impressive

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Indian Metals and Ferro Alloys' (NSE:IMFA) returns on capital, so let's have a look.

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)

0.34 = ₹6.5b ÷ (₹27b - ₹7.1b) (Based on the trailing twelve months to December 2021).

Thus, Indian Metals and Ferro Alloys has an ROCE of 34%. That's a fantastic return and not only that, it outpaces the average of 18% earned by companies in a similar 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're interested in investigating Indian Metals and Ferro Alloys' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Indian Metals and Ferro Alloys' ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 97% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

Our Take On Indian Metals and Ferro Alloys' ROCE

In summary, we're delighted to see that Indian Metals and Ferro Alloys has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Considering the stock has delivered 20% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

Like most companies, Indian Metals and Ferro Alloys does come with some risks, and we've found 1 warning sign that you should be aware of.

Indian Metals and Ferro Alloys is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.