Steppe Cement (LON:STCM): Are Investors Overlooking Returns On Capital?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. And in light of that, the trends we're seeing at Steppe Cement's (LON:STCM) look very promising so lets take a look.

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. Analysts use this formula to calculate it for Steppe Cement:

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%. In absolute terms that's a great return and it's even better than the Basic Materials industry average of 8.3%.

See our latest analysis for Steppe Cement

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, you can check out the forecasts from the analysts covering Steppe Cement here for free.

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.

The Bottom Line

In a nutshell, we're pleased to see that Steppe Cement has been able to generate higher returns from less capital. Since the stock has returned a staggering 250% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Steppe Cement can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Steppe Cement, we've discovered 2 warning signs that you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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