Is BlueScope Steel (ASX:BSL) A Future Multi-bagger?

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at BlueScope Steel (ASX:BSL) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on BlueScope Steel is:

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

0.076 = AU$674m ÷ (AU$11b - AU$2.4b) (Based on the trailing twelve months to December 2020).

So, BlueScope Steel has an ROCE of 7.6%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 9.6%.

Check out our latest analysis for BlueScope Steel

roce

In the above chart we have measured BlueScope Steel'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?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 7.6%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 36%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From BlueScope Steel's ROCE

All in all, it's terrific to see that BlueScope Steel is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 237% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.

BlueScope Steel does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...

While BlueScope Steel isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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. 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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