Investors Met With Slowing Returns on Capital At Adyton Resources (CVE:ADY)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. However, after briefly looking over the numbers, we don't think Adyton Resources (CVE:ADY) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Adyton Resources is:

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

0.18 = CA$2.7m ÷ (CA$16m - CA$748k) (Based on the trailing twelve months to December 2021).

Therefore, Adyton Resources has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 2.5% generated by the Metals and Mining industry.

Check out our latest analysis for Adyton Resources

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

The Trend Of ROCE

There hasn't been much to report for Adyton Resources' returns and its level of capital employed because both metrics have been steady for the past . It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Adyton Resources doesn't end up being a multi-bagger in a few years time.

What We Can Learn From Adyton Resources' ROCE

In summary, Adyton Resources isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Moreover, since the stock has crumbled 80% over the last year, it appears investors are expecting the worst. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Adyton Resources (of which 1 is potentially serious!) that you should know about.

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.