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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in BlueScope Steel's (ASX:BSL) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for BlueScope Steel, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.30 = AU$3.4b ÷ (AU$15b - AU$3.5b) (Based on the trailing twelve months to December 2021).
So, BlueScope Steel has an ROCE of 30%. That's a fantastic return and not only that, it outpaces the average of 8.8% earned by companies in a similar industry.
Above you can see how the current ROCE for BlueScope Steel 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 BlueScope Steel.
What Can We Tell From BlueScope Steel's ROCE Trend?
We like the trends that we're seeing from BlueScope Steel. Over the last five years, returns on capital employed have risen substantially to 30%. Basically the business is earning more per dollar of capital invested and in addition to that, 55% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Key Takeaway
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what BlueScope Steel has. And with a respectable 69% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if BlueScope Steel can keep these trends up, it could have a bright future ahead.
If you want to know some of the risks facing BlueScope Steel we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.
BlueScope Steel is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.