Returns On Capital Are A Standout For Olympic Steel (NASDAQ:ZEUS)

·3 min read

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Speaking of which, we noticed some great changes in Olympic Steel's (NASDAQ:ZEUS) returns on capital, so let's have a look.

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. To calculate this metric for Olympic Steel, this is the formula:

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

0.24 = US$205m ÷ (US$1.1b - US$245m) (Based on the trailing twelve months to June 2022).

So, Olympic Steel has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 20%.

See our latest analysis for Olympic Steel

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In the above chart we have measured Olympic Steel's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Olympic Steel here for free.

What Does the ROCE Trend For Olympic Steel Tell Us?

We like the trends that we're seeing from Olympic Steel. The data shows that returns on capital have increased substantially over the last five years to 24%. The amount of capital employed has increased too, by 65%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From Olympic Steel's ROCE

To sum it up, Olympic Steel has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with a respectable 78% 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. Therefore, we think it would be worth your time to check if these trends are going to continue.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Olympic Steel (of which 3 are a bit unpleasant!) that you should know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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

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.

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