Returns On Capital Signal Difficult Times Ahead For Steel Authority of India (NSE:SAIL)

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at Steel Authority of India (NSE:SAIL), so let's see why.

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What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Steel Authority of India:

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

0.055 = ₹50b ÷ (₹1.4t - ₹462b) (Based on the trailing twelve months to March 2025).

Therefore, Steel Authority of India has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 13%.

View our latest analysis for Steel Authority of India

In the above chart we have measured Steel Authority of India's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Steel Authority of India .

What The Trend Of ROCE Can Tell Us

In terms of Steel Authority of India's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 8.2% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Steel Authority of India becoming one if things continue as they have.

What We Can Learn From Steel Authority of India's ROCE

In summary, it's unfortunate that Steel Authority of India is generating lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a huge 354% 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.

On a final note, we found 2 warning signs for Steel Authority of India (1 is potentially serious) you should be aware of.

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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.