Investors Could Be Concerned With Vulcan Steel's (ASX:VSL) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Vulcan Steel (ASX:VSL), it didn't seem to tick all of these boxes.

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Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Vulcan Steel is:

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

0.11 = NZ$72m ÷ (NZ$877m - NZ$199m) (Based on the trailing twelve months to December 2024).

Thus, Vulcan Steel has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Metals and Mining industry.

See our latest analysis for Vulcan Steel

Above you can see how the current ROCE for Vulcan Steel 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 Vulcan Steel for free.

The Trend Of ROCE

In terms of Vulcan Steel's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 11% from 16% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

We're a bit apprehensive about Vulcan Steel because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 22% over the last three years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Vulcan Steel, we've spotted 3 warning signs, and 1 of them is significant.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.