Beacon Minerals (ASX:BCN) Is Reinvesting At Lower Rates Of Return

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Having said that, while the ROCE is currently high for Beacon Minerals (ASX:BCN), we aren't jumping out of our chairs because returns are decreasing.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Beacon Minerals is:

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

0.39 = AU$24m ÷ (AU$79m - AU$16m) (Based on the trailing twelve months to December 2021).

So, Beacon Minerals has an ROCE of 39%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 8.7%.

Check out our latest analysis for Beacon Minerals

Historical performance is a great place to start when researching a stock so above you can see the gauge for Beacon Minerals' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Beacon Minerals, check out these free graphs here.

What Can We Tell From Beacon Minerals' ROCE Trend?

When we looked at the ROCE trend at Beacon Minerals, we didn't gain much confidence. To be more specific, while the ROCE is still high, it's fallen from 60% where it was five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 21%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 39%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line On Beacon Minerals' ROCE

To conclude, we've found that Beacon Minerals is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 84% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to continue researching Beacon Minerals, you might be interested to know about the 4 warning signs that our analysis has discovered.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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.