Investors Will Want Salzgitter's (ETR:SZG) Growth In ROCE To Persist

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. 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. 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 Salzgitter (ETR:SZG) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Salzgitter, this is the formula:

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

0.081 = €538m ÷ (€10b - €3.7b) (Based on the trailing twelve months to December 2021).

Therefore, Salzgitter has an ROCE of 8.1%. Even though it's in line with the industry average of 8.1%, it's still a low return by itself.

See our latest analysis for Salzgitter

In the above chart we have measured Salzgitter's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Salzgitter here for free.

The Trend Of ROCE

Salzgitter has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 8.1% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

What We Can Learn From Salzgitter's ROCE

To bring it all together, Salzgitter has done well to increase the returns it's generating from its capital employed. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 33% to shareholders. So with that in mind, we think the stock deserves further research.

One final note, you should learn about the 3 warning signs we've spotted with Salzgitter (including 1 which makes us a bit uncomfortable) .

While Salzgitter may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.