Shareholders would benefit from a repeat of recent growth in BlueScope Steel’s (ASX:BSL) yields

There are a few key trends to look out for if we want to identify the next multi-bagger. Ideally, a business will show two trends; first growth to return to on capital employed (ROCE) and on the other hand, growth amount capital employed. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. So when we looked at the ROCE trend of BlueScope Steel (ASX:BSL) we really liked what we saw.

What is return on capital employed (ROCE)?

If you’ve never worked with ROCE before, it measures the “yield” (pre-tax profit) a company generates from the capital used in its business. To calculate this metric for BlueScope Steel, here is the formula:

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

0.30 = AU$3.4 billion ÷ (AU$15 billion – AU$3.5 billion) (Based on the last twelve months to December 2021).

So, BlueScope Steel has a ROCE of 30%. That’s a fantastic return and not only that, it tops the 8.7% average earned by companies in a similar industry.

Check out our latest review for BlueScope Steel

ASX: BSL Return on Capital Employed May 15, 2022

In the graph above, we measured BlueScope Steel’s past ROCE against its past performance, but the future is arguably more important. If you wish, you can view analyst forecasts covering BlueScope Steel here for free.

What is the return trend?

Investors would be thrilled with what’s happening at BlueScope Steel. Data shows that capital returns have increased significantly over the past five years to 30%. Basically, the business earns more per dollar of invested capital and on top of that, 55% more capital is also utilized now. Increasing returns on an increasing amount of capital are common among multi-baggers and that’s why we’re impressed.

The Key Takeaway

A business that increases its returns on capital and can constantly reinvest in itself is a highly sought after trait, and that is what BlueScope Steel possesses. Given that the stock has returned a solid 60% to shareholders over the past five years, it’s fair to say that investors are starting to recognize these changes. So given that the stock has proven to have some promising trends, it’s worth researching the company further to see if those trends are likely to persist.

If you want to know more about BlueScope Steel, we spotted 3 warning signs, and 1 of them is concerning.

High yields are a key ingredient to strong performance, so check out our free list of stocks generating high returns on equity with strong balance sheets.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

Comments are closed.