These Trends Paint A Bright Future For Steppe Cement (LON:STCM)
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Steppe Cement's (LON:STCM) look very promising so lets take a look.
What is Return On Capital Employed (ROCE)?
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 Steppe Cement, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = US$16m ÷ (US$89m - US$14m) (Based on the trailing twelve months to June 2020).
Therefore, Steppe Cement has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Basic Materials industry average of 8.3%.
See our latest analysis for Steppe Cement
Above you can see how the current ROCE for Steppe Cement 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 Steppe Cement here for free.
What Can We Tell From Steppe Cement's ROCE Trend?
Steppe Cement has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 535%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 49% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
Our Take On Steppe Cement's ROCE
From what we've seen above, Steppe Cement has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has returned a staggering 196% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
One more thing, we've spotted 2 warning signs facing Steppe Cement that you might find interesting.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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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