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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Steel & Tube Holdings (NZSE:STU) 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. The formula for this calculation on Steel & Tube Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.071 = NZ$20m ÷ (NZ$350m - NZ$62m) (Based on the trailing twelve months to December 2023).
Thus, Steel & Tube Holdings has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 11%.
View our latest analysis for Steel & Tube Holdings
Above you can see how the current ROCE for Steel & Tube Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Steel & Tube Holdings .
So How Is Steel & Tube Holdings' ROCE Trending?
Steel & Tube Holdings' ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 309% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
The Bottom Line On Steel & Tube Holdings' ROCE
In summary, we're delighted to see that Steel & Tube Holdings has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 30% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
If you'd like to know about the risks facing Steel & Tube Holdings, we've discovered 3 warning signs that you should be aware of.