Has Evergreen Steel (GTSM:2211) Got What It Takes To Become A Multi-Bagger?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. In light of that, when we looked at Evergreen Steel (GTSM:2211) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Evergreen Steel is:

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

0.098 = NT$1.5b ÷ (NT$21b - NT$5.5b) (Based on the trailing twelve months to September 2020).

Therefore, Evergreen Steel has an ROCE of 9.8%. On its own that's a low return, but compared to the average of 3.6% generated by the Metals and Mining industry, it's much better.

Check out our latest analysis for Evergreen Steel

In the above chart we have measured Evergreen Steel's prior ROCE against its prior performance, but the future is arguably more important. 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 Evergreen Steel Tell Us?

There hasn't been much to report for Evergreen Steel's returns and its level of capital employed because both metrics have been steady for the past three years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Evergreen Steel to be a multi-bagger going forward. That being the case, it makes sense that Evergreen Steel has been paying out 71% of its earnings to its shareholders. Most shareholders probably know this and own the stock for its dividend.

In Conclusion...

In summary, Evergreen Steel isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 19% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 2 warning signs with Evergreen Steel (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.

While Evergreen Steel 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. 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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