Manaksia Steels (NSE:MANAKSTEEL) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Manaksia Steels (NSE:MANAKSTEEL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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 Steels is:

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

0.031 = ₹96m ÷ (₹4.7b - ₹1.6b) (Based on the trailing twelve months to December 2024).

So, Manaksia Steels has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 14%.

See our latest analysis for Manaksia Steels

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Manaksia Steels.

What Does the ROCE Trend For Manaksia Steels Tell Us?

When we looked at the ROCE trend at Manaksia Steels, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.1% from 6.0% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On Manaksia Steels' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Manaksia Steels have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these poor fundamentals, the stock has gained a huge 450% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to continue researching Manaksia Steels, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Manaksia Steels 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.