Yahoo Finance Ferroglobe (NASDAQ:GSM) Might Have The Makings Of A Multi-Bagger
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Ferroglobe (NASDAQ:GSM) looks quite promising in regards to its trends of return on capital.
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 Ferroglobe:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = US$222m ÷ (US$1.8b - US$494m) (Based on the trailing twelve months to December 2023).
Therefore, Ferroglobe has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 9.4% generated by the Metals and Mining industry.
View our latest analysis for Ferroglobe
In the above chart we have measured Ferroglobe'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 analyst report for Ferroglobe .
What Can We Tell From Ferroglobe's ROCE Trend?
Ferroglobe has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 157%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 22% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
The Bottom Line On Ferroglobe's ROCE
From what we've seen above, Ferroglobe has managed to increase it's returns on capital all the while reducing it's capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Ferroglobe does have some risks though, and we've spotted 1 warning sign for Ferroglobe that you might be interested in.
While Ferroglobe isn't earning the highest return, check out this free list of companies that are 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.
