Returns At MSP Steel & Power (NSE:MSPL) Are On The Way Up

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. With that in mind, we've noticed some promising trends at MSP Steel & Power (NSE:MSPL) so let's look a bit deeper.

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. The formula for this calculation on MSP Steel & Power is:

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

0.076 = ₹869m ÷ (₹15b - ₹3.7b) (Based on the trailing twelve months to March 2021).

So, MSP Steel & Power has an ROCE of 7.6%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 12%.

View our latest analysis for MSP Steel & Power

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'd like to look at how MSP Steel & Power has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From MSP Steel & Power's ROCE Trend?

Shareholders will be relieved that MSP Steel & Power has broken into profitability. The company now earns 7.6% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by MSP Steel & Power has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

Our Take On MSP Steel & Power's ROCE

As discussed above, MSP Steel & Power appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.

MSP Steel & Power does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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