Sims Metal Management Ltd (ASX: SGM) is the largest dedicated metal recycler in Australia, New Zealand and the United States (US) and makes the majority of its revenue through the sale of recycled metals. Sims Metal Management is also indirectly responsible for helping to reduce global greenhouse gas emissions by producing metals using less energy than is traditionally required through non-recycled methods. This company has a positive impact on the planet and because of this might be an attractive investment for those investors who place a strong focus on sustainability.
The Sims Metal Management share price has fallen more than 40% from its 52-week high. SGM shares currently trade at $10.11 per share with a price-to-earnings ratio of below 12 and a price to book ratio of below 1. These metrics make the current share price appear reasonable and as such now might be a good opportunity to buy. However, a cheap price and operations that benefit the planet do not alone guarantee strong returns for investors.
Is there a compelling investment case for Sims Metal Management?
Sims Metal Management has failed to consistently grow revenue and earnings over the past 10 years. It has also failed to produce significant returns on equity for investors. Over this time period, book value per share has declined and investors have received an annual rate of return of -7.5%, which is disappointing.
The last two years have been an improvement, however, with earnings considerably higher than the five years prior. This has come off the back of stronger metal prices. Debt has also declined to low levels. Both positive signs for SGM shares.
Despite these recent financial improvements, I'm still not rushing to invest in this company. This is because I believe the performance of this company is closely tied to the prices of the metals it recycles. With metal prices hard to predict, so too is the future performance of this company and therefore I would prefer to invest elsewhere.
Foolish takeaway
I can understand why some investors might take an interest in Sims Metal Management shares, given the positive impact this company can have on the planet. However, as an investor I would much prefer to invest in a company that is able to set its own price rather than one which has to accept the price set by the market. This makes forecasting future returns more feasible.
