Stelco Holdings (TSE:STLC) Is Very Good At Capital Allocation

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Stelco Holdings' (TSE:STLC) returns on capital, so let's have a look.

What Is 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 Stelco Holdings is:

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

0.47 = CA$1.0b ÷ (CA$3.1b - CA$906m) (Based on the trailing twelve months to December 2022).

So, Stelco Holdings has an ROCE of 47%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 1.3%.

Check out our latest analysis for Stelco Holdings

Above you can see how the current ROCE for Stelco Holdings 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 Stelco Holdings here for free.

What The Trend Of ROCE Can Tell Us

Stelco Holdings is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 47%. 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 162%. 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.

The Bottom Line

In summary, it's great to see that Stelco Holdings can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 188% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Stelco Holdings can keep these trends up, it could have a bright future ahead.

On a final note, we found 4 warning signs for Stelco Holdings (2 don't sit too well with us) you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.