Is Steppe Cement (LON:STCM) The Next Multi-Bagger?

By
Simply Wall St
Published
March 09, 2021
AIM:STCM
Source: Shutterstock

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Steppe Cement's (LON:STCM) returns on capital, so let's have a look.

Understanding 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 Steppe Cement is:

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

0.21 = US$16m ÷ (US$89m - US$14m) (Based on the trailing twelve months to June 2020).

Thus, Steppe Cement has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 8.3% earned by companies in a similar industry.

Check out our latest analysis for Steppe Cement

roce
AIM:STCM Return on Capital Employed March 10th 2021

In the above chart we have measured Steppe Cement's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Steppe Cement.

The Trend Of ROCE

We're pretty happy with how the ROCE has been trending at Steppe Cement. The data shows that returns on capital have increased by 535% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 49% less capital than it was five years ago. Steppe Cement may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

Our Take On Steppe Cement's ROCE

In summary, it's great to see that Steppe Cement has been able to turn things around and earn higher returns on lower amounts of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a separate note, we've found 1 warning sign for Steppe Cement you'll probably want to know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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