Returns on Capital Paint A Bright Future For Kirloskar Ferrous Industries (NSE:KIRLFER)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in Kirloskar Ferrous Industries' (NSE:KIRLFER) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.47 = ₹6.6b ÷ (₹23b - ₹8.5b) (Based on the trailing twelve months to September 2021).

So, Kirloskar Ferrous Industries has an ROCE of 47%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 16%.

See our latest analysis for Kirloskar Ferrous Industries

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Kirloskar Ferrous Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Kirloskar Ferrous Industries' ROCE Trending?

We like the trends that we're seeing from Kirloskar Ferrous Industries. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 47%. The amount of capital employed has increased too, by 123%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From Kirloskar Ferrous Industries' ROCE

To sum it up, Kirloskar Ferrous Industries has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 37% return over the last year. In light of that, we think it's worth looking further into this stock because if Kirloskar Ferrous Industries can keep these trends up, it could have a bright future ahead.

If you'd like to know more about Kirloskar Ferrous Industries, we've spotted 3 warning signs, and 1 of them is significant.

Kirloskar Ferrous Industries 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.