EVRAZ (LON:EVR) Is Very Good At Capital Allocation

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. And in light of that, the trends we're seeing at EVRAZ's (LON:EVR) look very promising so lets take 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. To calculate this metric for EVRAZ, this is the formula:

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

0.24 = US$1.4b ÷ (US$9.0b - US$3.0b) (Based on the trailing twelve months to June 2020).

So, EVRAZ has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 14%.

See our latest analysis for EVRAZ

In the above chart we have measured EVRAZ'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 EVRAZ here for free.

What The Trend Of ROCE Can Tell Us

We're pretty happy with how the ROCE has been trending at EVRAZ. The figures show that over the last five years, returns on capital have grown by 43%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 26% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

Our Take On EVRAZ's ROCE

From what we've seen above, EVRAZ has managed to increase it's returns on capital all the while reducing it's capital base. 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.

One more thing, we've spotted 5 warning signs facing EVRAZ that you might find interesting.

EVRAZ 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.

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This article by Simply Wall St is general in nature. 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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