Is MSP Steel & Power (NSE:MSPL) A Future Multi-bagger?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in MSP Steel & Power's (NSE:MSPL) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for MSP Steel & Power:

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

0.049 = ₹552m ÷ (₹16b - ₹4.5b) (Based on the trailing twelve months to September 2020).

So, MSP Steel & Power has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 9.4%.

View our latest analysis for MSP Steel & Power

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

So How Is MSP Steel & Power's ROCE Trending?

It's great to see that MSP Steel & Power has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 4.9% on their capital employed. Additionally, the business is utilizing 22% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

What We Can Learn From MSP Steel & Power's ROCE

In summary, it's great to see that MSP Steel & Power has been able to turn things around and earn higher returns on lower amounts of capital. Given the stock has declined 28% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a separate note, we've found 2 warning signs for MSP Steel & Power you'll probably want to know about.

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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