Here's What To Make Of Newcrest Mining's (ASX:NCM) Decelerating Rates Of Return

What trends should we look for it we want to identify stocks that can 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Newcrest Mining (ASX:NCM), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Newcrest Mining is:

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

0.09 = US$1.2b ÷ (US$14b - US$824m) (Based on the trailing twelve months to December 2021).

So, Newcrest Mining has an ROCE of 9.0%. Even though it's in line with the industry average of 8.6%, it's still a low return by itself.

Check out our latest analysis for Newcrest Mining

Above you can see how the current ROCE for Newcrest Mining 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 Newcrest Mining here for free.

So How Is Newcrest Mining's ROCE Trending?

There are better returns on capital out there than what we're seeing at Newcrest Mining. Over the past five years, ROCE has remained relatively flat at around 9.0% and the business has deployed 29% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On Newcrest Mining's ROCE

In summary, Newcrest Mining has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly, the stock has only gained 30% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Newcrest Mining (including 1 which is significant) .

While Newcrest Mining 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.

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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.