What trends should we look for to identify stocks that can increase in value over the long term? Ideally, a company shows two trends; growth first yield on capital employed (ROCE) and secondly an increase quantity of deployed capital. If you see this, it usually means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Anglo-Asian mining (LON:AAZ), it didn’t seem to tick all of those boxes.
What is return on invested capital (ROCE)?
If you’re new to ROCE, it measures the “return” (earnings before tax) a company generates from the capital invested in its business. Analysts use this formula to calculate it for Anglo Asian Mining:
Return on capital employed = earnings before interest and tax (EBIT) ÷ (total assets – current liabilities)
0.056 = $9.1 million ÷ ($181 million – $18 million) (Based on the last twelve months to December 2022).
So, Anglo Asian Mining has a ROCE of 5.6%. In absolute terms, that is a low return and it also performs below the metals and mining industry average of 12%.
Check out our latest analysis for Anglo Asian Mining
In the chart above, we measured Anglo Asian Mining’s past ROCE against past performance, but the future is arguably more important. If you’re interested, you can check out analyst forecasts in our free report on analyst forecasts for the company.
So how is Anglo Asian Mining’s ROCE trending?
At first glance, the trend of ROCE in Anglo Asian Mining does not inspire confidence. To be more specific, the ROCE has dropped from 7.9% over the past five years. However, it appears that Anglo Asian Mining could reinvest for long-term growth, as while invested capital has increased, the company’s revenue has not changed much over the last 12 months. It’s worth keeping an eye on the company’s earnings from now on to see if these investments ultimately contribute to the bottom line.
On a side note, Anglo Asian Mining has done well to repay its current liabilities to 10% of its total assets. That could partly explain why the ROCE has decreased. In addition, this may reduce some aspects of the company’s risk, as the company’s suppliers or short-term creditors now fund less of its operations. Since the company is actually financing more of its operations with its own money, you could argue that this has made the company less efficient at generating ROCE.
What we can learn from Anglo Asian Mining’s ROCE
Finally, we found that Anglo Asian Mining is reinvesting in the business, but returns are declining. Investors must think better things are to come as the stock has knocked it out of the park, returning a 198% gain for shareholders owned over the past five years. However, unless these underlying trends become more positive, we would not have set our expectations too high.
Since virtually every business faces certain risks, it’s worth knowing what they are, and we’ve noticed 2 warning signs for Anglo Asian Mining (1 of which is a bit concerning!) you should know.
While Anglo Asian Mining may not be making the highest returns right now, we’ve put together a list of companies that are currently earning more than 25% return on equity. Check this out free list here.
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This Simply Wall St article is general in nature. We only comment based on historical data and analyst forecasts using an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or your financial situation. We aim to provide you with long-term focused analytics driven by fundamental data. Please note that our analysis may not take into account the latest price sensitive company announcements or quality material. Simply Wall St has no exposure to the listed stocks.
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