Mangalam Alloys' (NSE:MAL) Returns Have Hit A Wall

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. That's why when we briefly looked at Mangalam Alloys' (NSE:MAL) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

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 Mangalam Alloys:

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

0.10 = ₹184m ÷ (₹4.5b - ₹2.6b) (Based on the trailing twelve months to September 2024).

Therefore, Mangalam Alloys has an ROCE of 10%. In isolation, that's a pretty standard return but against the Metals and Mining industry average of 13%, it's not as good.

See our latest analysis for Mangalam Alloys

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mangalam Alloys' ROCE against it's prior returns. If you're interested in investigating Mangalam Alloys' past further, check out this free graph covering Mangalam Alloys' past earnings, revenue and cash flow.

What Does the ROCE Trend For Mangalam Alloys Tell Us?

While the returns on capital are good, they haven't moved much. The company has employed 45% more capital in the last five years, and the returns on that capital have remained stable at 10%. Since 10% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, Mangalam Alloys' current liabilities are still rather high at 59% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Mangalam Alloys' ROCE

To sum it up, Mangalam Alloys has simply been reinvesting capital steadily, at those decent rates of return. Yet over the last year the stock has declined 30%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

One final note, you should learn about the 3 warning signs we've spotted with Mangalam Alloys (including 2 which are potentially serious) .

While Mangalam Alloys 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.