Sunflag Iron and Steel (NSE:SUNFLAG) May Have Issues Allocating Its Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Sunflag Iron and Steel (NSE:SUNFLAG), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Sunflag Iron and Steel is:

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

0.074 = ₹1.4b ÷ (₹24b - ₹5.4b) (Based on the trailing twelve months to December 2020).

Thus, Sunflag Iron and Steel has an ROCE of 7.4%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 11%.

Check out 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're interested in investigating Sunflag Iron and Steel's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Sunflag Iron and Steel Tell Us?

On the surface, the trend of ROCE at Sunflag Iron and Steel doesn't inspire confidence. To be more specific, ROCE has fallen from 18% 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 related note, Sunflag Iron and Steel has decreased its current liabilities to 23% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

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

To conclude, we've found that Sunflag Iron and Steel is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 239% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to continue researching Sunflag Iron and Steel, you might be interested to know about the 1 warning sign that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

If you’re looking to trade Sunflag Iron and Steel, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.