Kirloskar Ferrous Industries (NSE:KIRLFER) Is Experiencing Growth In Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Kirloskar Ferrous Industries (NSE:KIRLFER) looks quite promising in regards to its trends of return on capital.

What Is 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. To calculate this metric for Kirloskar Ferrous Industries, this is the formula:

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

0.14 = ₹4.7b ÷ (₹53b - ₹20b) (Based on the trailing twelve months to June 2022).

So, Kirloskar Ferrous Industries has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Metals and Mining industry average of 17%.

View our latest analysis for Kirloskar Ferrous Industries

Above you can see how the current ROCE for Kirloskar Ferrous Industries compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Kirloskar Ferrous Industries here for free.

What The Trend Of ROCE Can Tell Us

Kirloskar Ferrous Industries is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 14%. Basically the business is earning more per dollar of capital invested and in addition to that, 395% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From Kirloskar Ferrous Industries' ROCE

In summary, it's great to see that Kirloskar Ferrous Industries can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Considering the stock has delivered 5.6% to its stockholders over the last year, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Kirloskar Ferrous Industries does have some risks though, and we've spotted 4 warning signs for Kirloskar Ferrous Industries that you might be interested in.

While Kirloskar Ferrous Industries 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. 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.