The Returns On Capital At Mahamaya Steel Industries (NSE:MAHASTEEL) Don't Inspire Confidence

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Mahamaya Steel Industries (NSE:MAHASTEEL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Mahamaya Steel Industries is:

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

0.058 = ₹95m ÷ (₹2.1b - ₹425m) (Based on the trailing twelve months to March 2022).

Thus, Mahamaya Steel Industries has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 17%.

See our latest analysis for Mahamaya Steel Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mahamaya Steel Industries' ROCE against it's prior returns. If you'd like to look at how Mahamaya Steel Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 8.2% five years ago, while the business's capital employed increased by 20%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. Mahamaya Steel Industries probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a related note, Mahamaya Steel Industries has decreased its current liabilities to 21% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Mahamaya Steel Industries. And there could be an opportunity here if other metrics look good too, because the stock has declined 23% in the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Mahamaya Steel Industries does have some risks though, and we've spotted 3 warning signs for Mahamaya Steel Industries 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.

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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.