Aya Gold & Silver (TSE:AYA) Is Looking To Continue Growing Its Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Aya Gold & Silver (TSE:AYA) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Aya Gold & Silver:

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

0.012 = US$1.6m ÷ (US$159m - US$19m) (Based on the trailing twelve months to June 2022).

Therefore, Aya Gold & Silver has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 4.3%.

Check out our latest analysis for Aya Gold & Silver

Above you can see how the current ROCE for Aya Gold & Silver 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 Aya Gold & Silver here for free.

The Trend Of ROCE

We're delighted to see that Aya Gold & Silver 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 1.2% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Aya Gold & Silver is utilizing 711% 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.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 12%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line On Aya Gold & Silver's ROCE

In summary, it's great to see that Aya Gold & Silver has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Aya Gold & Silver can keep these trends up, it could have a bright future ahead.

One more thing: We've identified 3 warning signs with Aya Gold & Silver (at least 1 which is a bit concerning) , and understanding these would certainly be useful.

While Aya Gold & Silver 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.