Companhia Siderúrgica Nacional (BVMF:CSNA3) Could Become A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of Companhia Siderúrgica Nacional (BVMF:CSNA3) we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Companhia Siderúrgica Nacional is:

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

0.30 = R$17b ÷ (R$75b - R$19b) (Based on the trailing twelve months to March 2022).

So, Companhia Siderúrgica Nacional has an ROCE of 30%. On its own that's a fantastic return on capital, though it's the same as the Metals and Mining industry average of 30%.

View our latest analysis for Companhia Siderúrgica Nacional

Above you can see how the current ROCE for Companhia Siderúrgica Nacional 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 Companhia Siderúrgica Nacional here for free.

So How Is Companhia Siderúrgica Nacional's ROCE Trending?

Investors would be pleased with what's happening at Companhia Siderúrgica Nacional. The data shows that returns on capital have increased substantially over the last five years to 30%. The amount of capital employed has increased too, by 46%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 26% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line On Companhia Siderúrgica Nacional's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Companhia Siderúrgica Nacional has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 95% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know more about Companhia Siderúrgica Nacional, we've spotted 4 warning signs, and 1 of them is concerning.

Companhia Siderúrgica Nacional is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.