Amerigo Resources (TSE:ARG) Will Be Hoping To Turn Its Returns On Capital Around

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Amerigo Resources (TSE:ARG), we've spotted some signs that it could be struggling, so let's investigate.

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. Analysts use this formula to calculate it for Amerigo Resources:

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

0.045 = US$6.8m ÷ (US$200m - US$48m) (Based on the trailing twelve months to December 2023).

So, Amerigo Resources has an ROCE of 4.5%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 1.9%.

Check out our latest analysis for Amerigo Resources

Above you can see how the current ROCE for Amerigo Resources 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 Amerigo Resources .

What Can We Tell From Amerigo Resources' ROCE Trend?

The trend of returns that Amerigo Resources is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 4.5% we see today. In addition to that, Amerigo Resources is now employing 24% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

In Conclusion...

To see Amerigo Resources reducing the capital employed in the business in tandem with diminishing returns, is concerning. However the stock has delivered a 64% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing to note, we've identified 1 warning sign with Amerigo Resources and understanding it should be part of your investment process.

While Amerigo Resources 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.