Returns On Capital At TCC Steel (KRX:002710) Paint A Concerning Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Although, when we looked at TCC Steel (KRX:002710), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on TCC Steel is:

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

0.033 = ₩11b ÷ (₩560b - ₩220b) (Based on the trailing twelve months to December 2023).

Thus, TCC Steel has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 7.1%.

Check out our latest analysis for TCC Steel

Historical performance is a great place to start when researching a stock so above you can see the gauge for TCC Steel's ROCE against it's prior returns. If you're interested in investigating TCC Steel's past further, check out this free graph covering TCC Steel's past earnings, revenue and cash flow.

What Can We Tell From TCC Steel's ROCE Trend?

On the surface, the trend of ROCE at TCC Steel doesn't inspire confidence. To be more specific, ROCE has fallen from 8.1% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From TCC Steel's ROCE

Bringing it all together, while we're somewhat encouraged by TCC Steel's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 1,963% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing: We've identified 2 warning signs with TCC Steel (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.