Investors Will Want Archon Minerals' (CVE:ACS) Growth In ROCE To Persist

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in Archon Minerals' (CVE:ACS) returns on capital, so let's have a look.

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. The formula for this calculation on Archon Minerals is:

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

0.00063 = CA$35k ÷ (CA$65m - CA$11m) (Based on the trailing twelve months to November 2020).

Therefore, Archon Minerals has an ROCE of 0.06%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 2.6%.

See our latest analysis for Archon Minerals

Historical performance is a great place to start when researching a stock so above you can see the gauge for Archon Minerals' ROCE against it's prior returns. If you're interested in investigating Archon Minerals' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Archon Minerals Tell Us?

We're delighted to see that Archon Minerals is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 0.06% which is no doubt a relief for some early shareholders. In regards to capital employed, Archon Minerals is using 26% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 16% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line

In a nutshell, we're pleased to see that Archon Minerals has been able to generate higher returns from less capital. And since the stock has dived 81% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Archon Minerals (of which 3 are significant!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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