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Why You Should Like Steel Dynamics, Inc.’s (NASDAQ:STLD) ROCE

Why You Should Like Steel Dynamics, Inc.’s (NASDAQ:STLD) ROCE


News is brought to you by Mr. Shailesh Karia


Published on 6th October, 2019


Today we’ll look at Steel Dynamics, Inc. (NASDAQ:STLD) and reflect on its potential as an investment. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.


First of all, we’ll work out how to calculate ROCE. Then we’ll compare its ROCE to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.


Understanding Return On Capital Employed (ROCE)


ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.


So, How Do We Calculate ROCE?


Analysts use this formula to calculate return on capital employed: Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities) Or for Steel Dynamics: 0.21 = US$1.5b ÷ (US$7.9b – US$926m) (Based on the trailing twelve months to June 2019.) So, Steel Dynamics has an ROCE of 21%.


Does Steel Dynamics Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Steel Dynamics’s ROCE appears to be substantially greater than the 8.9% average in the Metals and Mining industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Steel Dynamics’s ROCE in absolute terms currently looks quite high. 


We can see that, Steel Dynamics currently has an ROCE of 21% compared to its ROCE 3 years ago, which was 9.7%. This makes us wonder if the company is improving. You can see in the image below how Steel Dynamics’s ROCE compares to its industry.
 
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. Given the industry it operates in, Steel Dynamics could be considered cyclical. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company. 


Steel Dynamics’s Current Liabilities And Their Impact On Its ROCE
 
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.


Steel Dynamics has total assets of US$7.9b and current liabilities of US$926m. As a result, its current liabilities are equal to approximately 12% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.

Our Take On Steel Dynamics’s ROCE

Low current liabilities and high ROCE is a good combination, making Steel Dynamics look quite interesting. There might be better investments than Steel Dynamics out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.


Steel Dynamics is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.


We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.


If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.



Source : https://simplywall.st//


 





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