Some Investors May Be Worried About Champion Iron's (ASX:CIA) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Champion Iron (ASX:CIA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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 Champion Iron is:

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

0.18 = CA$450m ÷ (CA$2.8b - CA$360m) (Based on the trailing twelve months to September 2024).

Thus, Champion Iron has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 10.0% generated by the Metals and Mining industry.

Check out our latest analysis for Champion Iron

Above you can see how the current ROCE for Champion Iron compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Champion Iron .

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Champion Iron doesn't inspire confidence. Over the last five years, returns on capital have decreased to 18% from 57% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Champion Iron's ROCE

While returns have fallen for Champion Iron in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And long term investors must be optimistic going forward because the stock has returned a huge 160% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Champion Iron does have some risks though, and we've spotted 1 warning sign for Champion Iron that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.