Returns On Capital Are Showing Encouraging Signs At POSCO STEELEON (KRX:058430)

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at POSCO STEELEON (KRX:058430) and its trend of ROCE, we really liked what we saw.

Understanding 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. Analysts use this formula to calculate it for POSCO STEELEON:

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

0.084 = ₩31b ÷ (₩552b - ₩189b) (Based on the trailing twelve months to December 2023).

So, POSCO STEELEON has an ROCE of 8.4%. On its own, that's a low figure but it's around the 7.1% average generated by the Metals and Mining industry.

See our latest analysis for POSCO STEELEON

Historical performance is a great place to start when researching a stock so above you can see the gauge for POSCO STEELEON's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of POSCO STEELEON.

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.4%. The amount of capital employed has increased too, by 41%. So we're very much inspired by what we're seeing at POSCO STEELEON thanks to its ability to profitably reinvest capital.

The Bottom Line

In summary, it's great to see that POSCO STEELEON can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 172% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we've found 1 warning sign for POSCO STEELEON that we think you should be aware of.

While POSCO STEELEON may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.