MSP Steel & Power (NSE:MSPL) Might Have The Makings Of A Multi-Bagger

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at MSP Steel & Power (NSE:MSPL) and its trend of ROCE, we really liked what we saw.

What is 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. To calculate this metric for MSP Steel & Power, this is the formula:

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

0.084 = ₹961m ÷ (₹15b - ₹4.0b) (Based on the trailing twelve months to December 2021).

Therefore, MSP Steel & Power has an ROCE of 8.4%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 18%.

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.

How Are Returns Trending?

MSP Steel & Power has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 8.4% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

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

To bring it all together, MSP Steel & Power has done well to increase the returns it's generating from its capital employed. And since the stock has fallen 21% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing: We've identified 3 warning signs with MSP Steel & Power (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

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.