If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Angang Steel (HKG:347) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What is it?
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 Angang Steel is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.072 = CN¥4.5b ÷ (CN¥89b - CN¥27b) (Based on the trailing twelve months to March 2021).
Thus, Angang Steel has an ROCE of 7.2%. On its own, that's a low figure but it's around the 8.8% average generated by the Metals and Mining industry.
View our latest analysis for Angang Steel
Above you can see how the current ROCE for Angang Steel compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Angang Steel Tell Us?
Angang Steel has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 7.2% on its capital. And unsurprisingly, like most companies trying to break into the black, Angang Steel is utilizing 38% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 30%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.
The Bottom Line
In summary, it's great to see that Angang Steel has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 109% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.
While Angang Steel isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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About SEHK:347
Angang Steel
Engages in the production, processing, and sale of steel products in the People’s Republic of China and internationally.
Fair value with moderate growth potential.
