Investors Could Be Concerned With Mineral Commodities' (ASX:MRC) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, while the ROCE is currently high for Mineral Commodities (ASX:MRC), we aren't jumping out of our chairs because returns are decreasing.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for Mineral Commodities, this is the formula:

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

0.20 = US$14m ÷ (US$86m - US$14m) (Based on the trailing twelve months to December 2020).

So, Mineral Commodities has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 8.9%.

Check out our latest analysis for Mineral Commodities

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'd like to look at how Mineral Commodities has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We weren't thrilled with the trend because Mineral Commodities' ROCE has reduced by 47% over the last five years, while the business employed 105% more capital. That being said, Mineral Commodities raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Mineral Commodities probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

Our Take On Mineral Commodities' ROCE

In summary, Mineral Commodities is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 115% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Mineral Commodities does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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