We Like These Underlying Return On Capital Trends At S.A.L. Steel (NSE:SALSTEEL)

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, S.A.L. Steel (NSE:SALSTEEL) looks quite promising in regards to its trends of return on capital.

What Is 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. To calculate this metric for S.A.L. Steel, this is the formula:

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

0.12 = ₹225m ÷ (₹3.1b - ₹1.2b) (Based on the trailing twelve months to December 2024).

So, S.A.L. Steel has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 14% generated by the Metals and Mining industry.

See our latest analysis for S.A.L. Steel

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

What The Trend Of ROCE Can Tell Us

S.A.L. Steel's ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 97% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line On S.A.L. Steel's ROCE

To sum it up, S.A.L. Steel is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 840% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One final note, you should learn about the 4 warning signs we've spotted with S.A.L. Steel (including 2 which are a bit unpleasant) .

While S.A.L. Steel isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.