Investors Met With Slowing Returns on Capital At Abcourt Mines (CVE:ABI)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Abcourt Mines (CVE:ABI), it didn't seem to tick all of these boxes.

Understanding 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. Analysts use this formula to calculate it for Abcourt Mines:

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

0.062 = CA$2.6m ÷ (CA$50m - CA$7.3m) (Based on the trailing twelve months to June 2021).

So, Abcourt Mines has an ROCE of 6.2%. On its own that's a low return, but compared to the average of 4.0% generated by the Metals and Mining industry, it's much better.

Check out our latest analysis for Abcourt Mines

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're interested in investigating Abcourt Mines' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

The returns on capital haven't changed much for Abcourt Mines in recent years. The company has consistently earned 6.2% for the last five years, and the capital employed within the business has risen 36% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From Abcourt Mines' ROCE

Long story short, while Abcourt Mines has been reinvesting its capital, the returns that it's generating haven't increased.

On a final note, we've found 1 warning sign for Abcourt Mines that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.