What Can The Trends At MSP Steel & Power (NSE:MSPL) Tell Us About Their Returns?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.049 = ₹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%.

See 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 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?

Like most people, we're pleased that MSP Steel & Power is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. 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 a nutshell, we're pleased to see that MSP Steel & Power has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 40% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing to note, we've identified 1 warning sign with MSP Steel & Power and understanding this should be part of your investment process.

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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This article by Simply Wall St is general in nature. 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.
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