What are the first trends to look for to identify a title that could multiply over the long term? A common approach is to try to find a business with Return on capital employed (ROCE) which increases, in connection 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. With this in mind, the ROCE of Southern copper (NYSE: SCCO) looks great, so let’s see what the trend can tell us.
Understanding Return on Capital Employed (ROCE)
For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. To calculate this metric for Southern Copper, here is the formula:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.34 = US $ 5.6B ÷ (US $ 18B – US $ 1.8B) (Based on the last twelve months up to September 2021).
So, Southern Copper has a ROCE of 34%. This is a fantastic return and not only that, it exceeds the 15% average earned by companies in a similar industry.
Check out our latest review for Southern Copper
In the chart above, we’ve measured Southern Copper’s past ROCE against its past performance, but arguably the future is more important. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Southern Copper.
What the ROCE trend can tell us
Investors would be delighted with what happens at Southern Copper. Figures show that over the past five years, returns on capital employed have increased significantly to 34%. The company actually makes more money per dollar of capital used, and it should be noted that the amount of capital has also increased by 35%. So we’re very inspired by what we’re seeing at Southern Copper through its ability to reinvest capital profitably.
Our opinion on the ROCE of Southern Copper
Overall, it’s great to see Southern Copper reaping the rewards of past investments and growing its capital base. And as the stock has performed exceptionally well over the past five years, these trends are being taken into account by investors. So, given that the stock has proven to have some promising trends, it’s worth doing more research on the company to see if these trends are likely to persist.
One last note, you should inquire about the 3 warning signs we spotted some Southern Copper (including 1 which is a bit unpleasant).
Southern Copper is not the only security to generate high returns. If you want to see more, check out our free List of companies delivering high returns on equity with strong fundamentals.
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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 documents. Simply Wall St has no position in the mentioned stocks.