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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Ferroglobe (NASDAQ:GSM) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Ferroglobe is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.081 = US$81m ÷ (US$1.5b - US$449m) (Based on the trailing twelve months to December 2024).
Thus, Ferroglobe has an ROCE of 8.1%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 10%.
See our latest analysis for Ferroglobe
In the above chart we have measured Ferroglobe'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 Ferroglobe for free.
What The Trend Of ROCE Can Tell Us
We're delighted to see that Ferroglobe is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 8.1% which is no doubt a relief for some early shareholders. In regards to capital employed, Ferroglobe is using 25% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
What We Can Learn From Ferroglobe's ROCE
In summary, it's great to see that Ferroglobe has been able to turn things around and earn higher returns on lower amounts of capital. And a remarkable 635% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Ferroglobe can keep these trends up, it could have a bright future ahead.