Returns On Capital Are A Standout For Southern Copper (NYSE:SCCO)

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Southern Copper (NYSE:SCCO) looks great, so lets see what the trend can tell us.

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. To calculate this metric for Southern Copper, this is the formula:

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

0.28 = US$4.4b ÷ (US$17b - US$1.2b) (Based on the trailing twelve months to December 2022).

Thus, Southern Copper has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 17%.

See our latest analysis for Southern Copper

Above you can see how the current ROCE for Southern Copper compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Southern Copper.

What Can We Tell From Southern Copper's ROCE Trend?

Investors would be pleased with what's happening at Southern Copper. Over the last five years, returns on capital employed have risen substantially to 28%. 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 Southern Copper thanks to its ability to profitably reinvest capital.

What We Can Learn From Southern Copper's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Southern Copper has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 77% return over the last five years. 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.

Southern Copper does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those make us uncomfortable...

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.