Steelcast (NSE:STEELCAS) Is Achieving High Returns On Its Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. And in light of that, the trends we're seeing at Steelcast's (NSE:STEELCAS) look very promising so lets take a look.

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 Steelcast, this is the formula:

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

0.36 = ₹685m ÷ (₹2.8b - ₹876m) (Based on the trailing twelve months to September 2022).

Therefore, Steelcast has an ROCE of 36%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 15%.

See our latest analysis for Steelcast

Historical performance is a great place to start when researching a stock so above you can see the gauge for Steelcast's ROCE against it's prior returns. If you're interested in investigating Steelcast's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Steelcast. Over the last five years, returns on capital employed have risen substantially to 36%. Basically the business is earning more per dollar of capital invested and in addition to that, 47% more capital is being employed now too. So we're very much inspired by what we're seeing at Steelcast thanks to its ability to profitably reinvest capital.

On a related note, the company's ratio of current liabilities to total assets has decreased to 32%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Steelcast has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Steelcast's ROCE

To sum it up, Steelcast has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 59% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a separate note, we've found 1 warning sign for Steelcast you'll probably want to know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.