Algoma Steel Group (NASDAQ:ASTL) Knows How To Allocate Capital Effectively

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of Algoma Steel Group (NASDAQ:ASTL) we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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 Algoma Steel Group:

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

0.27 = CA$581m ÷ (CA$2.5b - CA$416m) (Based on the trailing twelve months to December 2022).

Thus, Algoma Steel Group has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 15%.

See our latest analysis for Algoma Steel Group

roce

In the above chart we have measured Algoma Steel Group'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 report on analyst forecasts for the company.

How Are Returns Trending?

Algoma Steel Group has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making two years ago but is is now generating 27% on its capital. And unsurprisingly, like most companies trying to break into the black, Algoma Steel Group is utilizing 70% more capital than it was two years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Our Take On Algoma Steel Group's ROCE

Overall, Algoma Steel Group gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Astute investors may have an opportunity here because the stock has declined 23% in the last year. So researching this company further and determining whether or not these trends will continue seems justified.

On a final note, we found 3 warning signs for Algoma Steel Group (2 are potentially serious) you should be aware of.

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.

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