To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Alphamin Resources (CVE:AFM) looks quite promising in regards to its trends of return on capital.
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. To calculate this metric for Alphamin Resources, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.081 = US$21m ÷ (US$297m - US$42m) (Based on the trailing twelve months to September 2020).
So, Alphamin Resources has an ROCE of 8.1%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 0.8%.
View our latest analysis for Alphamin Resources
Historical performance is a great place to start when researching a stock so above you can see the gauge for Alphamin Resources' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Alphamin Resources, check out these free graphs here.
So How Is Alphamin Resources' ROCE Trending?
Alphamin Resources has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 8.1% on its capital. And unsurprisingly, like most companies trying to break into the black, Alphamin Resources is utilizing 288% 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 side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 14% of the business, which is more than it was five years ago. 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.
What We Can Learn From Alphamin Resources' ROCE
Overall, Alphamin Resources gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting 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 Alphamin Resources can keep these trends up, it could have a bright future ahead.
On a final note, we've found 2 warning signs for Alphamin Resources that we think you should be aware of.
While Alphamin Resources 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. 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.
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About TSXV:AFM
Alphamin Resources
Engages in the production and sale of tin concentrates.
Flawless balance sheet with questionable track record.
