Steel Dynamics (NASDAQ:STLD) Knows How To Allocate Capital Effectively

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. And in light of that, the trends we're seeing at Steel Dynamics' (NASDAQ:STLD) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Steel Dynamics:

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

0.36 = US$4.4b ÷ (US$14b - US$1.8b) (Based on the trailing twelve months to March 2023).

Thus, Steel Dynamics has an ROCE of 36%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 12%.

See our latest analysis for Steel Dynamics

roce

Above you can see how the current ROCE for Steel Dynamics compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Steel Dynamics here for free.

How Are Returns Trending?

We like the trends that we're seeing from Steel Dynamics. The data shows that returns on capital have increased substantially over the last five years to 36%. Basically the business is earning more per dollar of capital invested and in addition to that, 103% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Steel Dynamics' ROCE

To sum it up, Steel Dynamics has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.

One more thing, we've spotted 1 warning sign facing Steel Dynamics that you might find interesting.

Steel Dynamics is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.

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