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If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Ryerson Holding (NYSE:RYI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. To calculate this metric for Ryerson Holding, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.081 = US$162m ÷ (US$2.7b - US$729m) (Based on the trailing twelve months to March 2024).
So, Ryerson Holding has an ROCE of 8.1%. On its own, that's a low figure but it's around the 8.8% average generated by the Metals and Mining industry.
See our latest analysis for Ryerson Holding
Above you can see how the current ROCE for Ryerson Holding compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ryerson Holding for free.
What Can We Tell From Ryerson Holding's ROCE Trend?
When we looked at the ROCE trend at Ryerson Holding, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 8.1% from 11% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
What We Can Learn From Ryerson Holding's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Ryerson Holding have fallen, meanwhile the business is employing more capital than it was five years ago. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 185%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.