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The Trend Of High Returns At Ferroglobe (NASDAQ:GSM) Has Us Very Interested

Simply Wall St ·  {{timeTz}}

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Ferroglobe (NASDAQ:GSM) looks great, so lets see what the trend can tell us.

What Is 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. To calculate this metric for Ferroglobe, this is the formula:

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

0.45 = US$569m ÷ (US$1.9b - US$643m) (Based on the trailing twelve months to June 2022).

So, Ferroglobe has an ROCE of 45%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 21%.

See our latest analysis for Ferroglobe

roceNasdaqCM:GSM Return on Capital Employed September 25th 2022

Above you can see how the current ROCE for Ferroglobe 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 Ferroglobe here for free.

The Trend Of ROCE

Like most people, we're pleased that Ferroglobe is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 45% which is no doubt a relief for some early shareholders. In regards to capital employed, Ferroglobe is using 27% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 34% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line

From what we've seen above, Ferroglobe has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 59% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One final note, you should learn about the 2 warning signs we've spotted with Ferroglobe (including 1 which can't be ignored) .

Ferroglobe 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.

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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