Investors Will Want Manaksia Coated Metals & Industries' (NSE:MANAKCOAT) Growth In ROCE To Persist

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at Manaksia Coated Metals & Industries (NSE:MANAKCOAT) and its trend of ROCE, we really liked what we saw.

Understanding 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. The formula for this calculation on Manaksia Coated Metals & Industries is:

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

0.12 = ₹245m ÷ (₹5.1b - ₹3.0b) (Based on the trailing twelve months to September 2022).

So, Manaksia Coated Metals & Industries has an ROCE of 12%. In isolation, that's a pretty standard return but against the Metals and Mining industry average of 15%, it's not as good.

Check out the opportunities and risks within the IN Metals and Mining industry.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Manaksia Coated Metals & Industries' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Manaksia Coated Metals & Industries, check out these free graphs here.

How Are Returns Trending?

Manaksia Coated Metals & Industries is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 12%. Basically the business is earning more per dollar of capital invested and in addition to that, 33% more capital is being employed now too. So we're very much inspired by what we're seeing at Manaksia Coated Metals & Industries thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 59% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On Manaksia Coated Metals & Industries' ROCE

In summary, it's great to see that Manaksia Coated Metals & 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. Since the stock has only returned 18% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One more thing: We've identified 2 warning signs with Manaksia Coated Metals & Industries (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

While Manaksia Coated Metals & 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.