CSN Mineração (BVMF:CMIN3) Could Be Struggling To Allocate Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at CSN Mineração (BVMF:CMIN3), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for CSN Mineração, this is the formula:

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

0.21 = R$5.3b ÷ (R$34b - R$9.3b) (Based on the trailing twelve months to September 2024).

So, CSN Mineração has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 9.3%.

See our latest analysis for CSN Mineração

Above you can see how the current ROCE for CSN Mineração compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for CSN Mineração .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at CSN Mineração, we didn't gain much confidence. While it's comforting that the ROCE is high, five years ago it was 33%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, CSN Mineração's current liabilities have increased over the last five years to 27% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 21%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From CSN Mineração's ROCE

Bringing it all together, while we're somewhat encouraged by CSN Mineração's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 22% over the last three years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

If you want to know some of the risks facing CSN Mineração we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.

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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.