Returns on Capital Paint A Bright Future For Reliance Steel & Aluminum (NYSE:RS)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Reliance Steel & Aluminum's (NYSE:RS) returns on capital, so let's have a look.

What Is 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 Reliance Steel & Aluminum is:

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

0.25 = US$2.3b ÷ (US$10b - US$975m) (Based on the trailing twelve months to March 2023).

Thus, Reliance Steel & Aluminum has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.

Check out our latest analysis for Reliance Steel & Aluminum

In the above chart we have measured Reliance Steel & Aluminum'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 Reliance Steel & Aluminum here for free.

What Can We Tell From Reliance Steel & Aluminum's ROCE Trend?

The trends we've noticed at Reliance Steel & Aluminum are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 25%. Basically the business is earning more per dollar of capital invested and in addition to that, 27% more capital is being employed now too. So we're very much inspired by what we're seeing at Reliance Steel & Aluminum thanks to its ability to profitably reinvest capital.

Our Take On Reliance Steel & Aluminum's ROCE

All in all, it's terrific to see that Reliance Steel & Aluminum is reaping the rewards from prior investments and is growing its capital base. And a remarkable 190% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Reliance Steel & Aluminum can keep these trends up, it could have a bright future ahead.

On a final note, we found 2 warning signs for Reliance Steel & Aluminum (1 is a bit concerning) you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.