AMAG Austria Metall (VIE:AMAG) Is Reinvesting At Lower Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at AMAG Austria Metall (VIE:AMAG), it didn't seem to tick all of these boxes.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for AMAG Austria Metall:

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

0.013 = €17m ÷ (€1.5b - €268m) (Based on the trailing twelve months to December 2020).

Therefore, AMAG Austria Metall has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 9.6%.

View our latest analysis for AMAG Austria Metall

Above you can see how the current ROCE for AMAG Austria Metall 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 AMAG Austria Metall here for free.

So How Is AMAG Austria Metall's ROCE Trending?

On the surface, the trend of ROCE at AMAG Austria Metall doesn't inspire confidence. Around five years ago the returns on capital were 4.2%, but since then they've fallen to 1.3%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From AMAG Austria Metall's ROCE

In summary, we're somewhat concerned by AMAG Austria Metall's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 17% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you want to know some of the risks facing AMAG Austria Metall we've found 3 warning signs (1 is concerning!) that you should be aware of before investing here.

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

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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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