Returns On Capital At Sunflag Iron and Steel (NSE:SUNFLAG) Paint A Concerning Picture

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. However, after investigating Sunflag Iron and Steel (NSE:SUNFLAG), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Sunflag Iron and Steel, this is the formula:

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

0.056 = ₹3.1b ÷ (₹65b - ₹9.0b) (Based on the trailing twelve months to September 2023).

So, Sunflag Iron and Steel has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 14%.

See our latest analysis for Sunflag Iron and Steel

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

The Trend Of ROCE

When we looked at the ROCE trend at Sunflag Iron and Steel, we didn't gain much confidence. To be more specific, ROCE has fallen from 19% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Sunflag Iron and Steel has done well to pay down its current liabilities to 14% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Sunflag Iron and Steel's ROCE

In summary, Sunflag Iron and Steel is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 374% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Sunflag Iron and Steel does have some risks though, and we've spotted 1 warning sign for Sunflag Iron and Steel that you might be interested in.

While Sunflag Iron and Steel may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.