Will the Promising Trends At Steel Dynamics (NASDAQ:STLD) Continue?
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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Steel Dynamics (NASDAQ:STLD) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Steel Dynamics:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$867m ÷ (US$9.3b - US$1.3b) (Based on the trailing twelve months to December 2020).
Therefore, Steel Dynamics has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.7% generated by the Metals and Mining industry.
View our latest analysis for Steel Dynamics
Above you can see how the current ROCE for Steel Dynamics 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 Steel Dynamics here for free.
So How Is Steel Dynamics' ROCE Trending?
We like the trends that we're seeing from Steel Dynamics. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 41% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
Our Take On Steel Dynamics' ROCE
All in all, it's terrific to see that Steel Dynamics is reaping the rewards from prior investments and is growing its capital base. And a remarkable 151% 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 Steel Dynamics can keep these trends up, it could have a bright future ahead.
If you'd like to know about the risks facing Steel Dynamics, we've discovered 1 warning sign that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
This article by Simply Wall St is general in nature. 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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