Companhia Siderúrgica Nacional (BVMF:CSNA3) Is Achieving High Returns On Its Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Companhia Siderúrgica Nacional's (BVMF:CSNA3) returns on capital, so let's have a look.

What is 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 Companhia Siderúrgica Nacional, this is the formula:

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

0.27 = R$16b ÷ (R$79b - R$19b) (Based on the trailing twelve months to June 2021).

So, Companhia Siderúrgica Nacional has an ROCE of 27%. In absolute terms that's a very respectable return and compared to the Metals and Mining industry average of 24% it's pretty much on par.

See 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.

What Can We Tell From Companhia Siderúrgica Nacional's ROCE Trend?

We like the trends that we're seeing from Companhia Siderúrgica Nacional. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 27%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 55%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

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. The current liabilities has increased to 24% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line

All in all, it's terrific to see that Companhia Siderúrgica Nacional is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 196% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One final note, you should learn about the 5 warning signs we've spotted with Companhia Siderúrgica Nacional (including 1 which is a bit unpleasant) .

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.

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.

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