If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at Inca Minerals (ASX:ICG) and its trend of ROCE, we really liked what we saw.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Inca Minerals, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.068 = AU$1.7m ÷ (AU$25m - AU$299k) (Based on the trailing twelve months to December 2021).
So, Inca Minerals has an ROCE of 6.8%. In absolute terms, that's a low return but it's around the Metals and Mining industry average of 7.7%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Inca Minerals' past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Inca Minerals' ROCE Trending?
We're delighted to see that Inca Minerals is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 6.8% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Inca Minerals is utilizing 386% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
The Bottom Line On Inca Minerals' ROCE
Long story short, we're delighted to see that Inca Minerals' reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 69% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Inca Minerals does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those is a bit concerning...
While Inca Minerals may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
Valuation is complex, but we're helping make it simple.
Find out whether Inca Minerals is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
Inca Minerals Limited, a junior resource company, engages in the acquisition, exploration, evaluation, and development of mineral properties.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
|Analysis Area||Score (0-6)|
Read more about these checks in the individual report sections or in our analysis model.
Flawless balance sheet and slightly overvalued.