Sunflag Iron and Steel (NSE:SUNFLAG) Will Be Hoping To Turn Its Returns On Capital Around

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Sunflag Iron and Steel (NSE:SUNFLAG), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. Analysts use this formula to calculate it for Sunflag Iron and Steel:

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

0.11 = ₹3.5b ÷ (₹43b - ₹10b) (Based on the trailing twelve months to December 2022).

So, Sunflag Iron and Steel has an ROCE of 11%. In absolute terms, that's a pretty standard return but compared to the Metals and Mining industry average it falls behind.

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 Can We Tell From Sunflag Iron and Steel's ROCE Trend?

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. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Sunflag Iron and Steel has decreased its current liabilities to 24% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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

In summary, despite lower returns in the short term, we're encouraged to see that Sunflag Iron and Steel is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 80% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing: We've identified 2 warning signs with Sunflag Iron and Steel (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.