Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So when we looked at Schnitzer Steel Industries (NASDAQ:SCHN) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Schnitzer Steel Industries:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.019 = US$24m ÷ (US$1.5b – US$165m) (Based on the trailing twelve months to May 2020).
Thus, Schnitzer Steel Industries has an ROCE of 1.9%. In absolute terms, that’s a low return and it also under-performs the Metals and Mining industry average of 8.0%.
Check out our latest analysis for Schnitzer Steel Industries
Above you can see how the current ROCE for Schnitzer Steel Industries compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Schnitzer Steel Industries.
What Does the ROCE Trend For Schnitzer Steel Industries Tell Us?
We’re glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 1.9%. The company is effectively making more money per dollar of capital used, and it’s worth noting that the amount of capital has increased too, by 48%. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, a combination that’s common among multi-baggers.
To sum it up, Schnitzer Steel Industries has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 48% to shareholders over the last five years, it’s fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing, we’ve spotted 4 warning signs facing Schnitzer Steel Industries that you might find interesting.
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.
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.
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