What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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?
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 Aya Gold & Silver, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = US$9.2m ÷ (US$158m - US$15m) (Based on the trailing twelve months to September 2021).
Thus, Aya Gold & Silver has an ROCE of 6.4%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 2.3%.
In the above chart we have measured Aya Gold & Silver's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Aya Gold & Silver's ROCE Trending?
The fact that Aya Gold & Silver is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 6.4% on its capital. And unsurprisingly, like most companies trying to break into the black, Aya Gold & Silver is utilizing 743% 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.
On a related note, the company's ratio of current liabilities to total assets has decreased to 9.4%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Aya Gold & Silver has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
The Bottom Line On Aya Gold & Silver's ROCE
To the delight of most shareholders, Aya Gold & Silver has now broken into profitability. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
If you want to continue researching Aya Gold & Silver, you might be interested to know about the 3 warning signs that our analysis has discovered.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.