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Why Schnitzer Steel Industries, Inc.’s (NASDAQ:SCHN) Return On Capital Employed Is Impressive

Simply Wall St

Today we'll look at Schnitzer Steel Industries, Inc. (NASDAQ:SCHN) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

How Do You Calculate Return On Capital Employed?

Analysts use this formula to calculate return on capital employed:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Schnitzer Steel Industries:

0.12 = US$107m ÷ (US$1.1b - US$177m) (Based on the trailing twelve months to May 2019.)

So, Schnitzer Steel Industries has an ROCE of 12%.

View our latest analysis for Schnitzer Steel Industries

Does Schnitzer Steel Industries Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Schnitzer Steel Industries's ROCE is meaningfully higher than the 8.9% average in the Metals and Mining industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Separate from Schnitzer Steel Industries's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

Our data shows that Schnitzer Steel Industries currently has an ROCE of 12%, compared to its ROCE of 2.1% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Schnitzer Steel Industries's ROCE compares to its industry. Click to see more on past growth.

NasdaqGS:SCHN Past Revenue and Net Income, October 1st 2019
NasdaqGS:SCHN Past Revenue and Net Income, October 1st 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. Given the industry it operates in, Schnitzer Steel Industries could be considered cyclical. Since the future is so important for investors, you should check out our free report on analyst forecasts for Schnitzer Steel Industries.

What Are Current Liabilities, And How Do They Affect Schnitzer Steel Industries's ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Schnitzer Steel Industries has total liabilities of US$177m and total assets of US$1.1b. Therefore its current liabilities are equivalent to approximately 16% of its total assets. Low current liabilities are not boosting the ROCE too much.

What We Can Learn From Schnitzer Steel Industries's ROCE

This is good to see, and with a sound ROCE, Schnitzer Steel Industries could be worth a closer look. Schnitzer Steel Industries shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.