To find multi-bagger stock, what are the underlying trends we need to look for in a business? A common approach is to try to find a business with Return on capital employed (ROCE) which increases, in line with growth amount capital employed. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of JSW steel (NSE: JSWSTEEL) we really liked what we saw.
What is Return on Employee Capital (ROCE)?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for JSW Steel, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.23 = 242b ÷ (₹ 1.5t – ₹ 433b) (Based on the last twelve months up to June 2021).
Therefore, JSW Steel has a ROCE of 23%. In absolute terms, this is an excellent return and is even better than the 15% average for the metals and mining industry.
See our latest review for JSW Steel
In the graph above, we measured JSW Steel’s past ROCE against its past performance, but the future is arguably more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for JSW Steel.
What does the ROCE trend tell us for JSW Steel?
Investors would be delighted with what happens at JSW Steel. Over the past five years, returns on capital employed have increased substantially to 23%. The company actually makes more money per dollar of capital employed, and it should be noted that the amount of capital has also increased, by 84%. This may indicate that there are plenty of opportunities to invest capital in-house and at ever higher rates, a common combination among multi-baggers.
The bottom line
In summary, it is great to see that JSW Steel can increase returns by systematically reinvesting capital at increasing rates of return, as these are some of the key ingredients in these highly sought after multi-baggers. And a remarkable 282% total return over the past five years tells us that investors are expecting more good things in the future. That being said, we still believe promising fundamentals mean the company deserves additional due diligence.
One last note, you should inquire about the 3 warning signs we spotted with JSW Steel (including 1 which is potentially serious).
If you want to look for more stocks that have generated high returns, check out this free list of stocks with strong balance sheets that also generate high returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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