Horizon Copper (CVE:HCU) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Horizon Copper (CVE:HCU) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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 Horizon Copper, this is the formula:

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

0.0013 = US$673k ÷ (US$518m - US$9.1m) (Based on the trailing twelve months to June 2024).

Thus, Horizon Copper has an ROCE of 0.1%. On its own that's a low return on capital but it's in line with the industry's average returns of -0.02%.

View our latest analysis for Horizon Copper

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

The Trend Of ROCE

In terms of Horizon Copper's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 6.2% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Horizon Copper. And long term investors must be optimistic going forward because the stock has returned a huge 364% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Horizon Copper (of which 3 don't sit too well with us!) that you should know about.

While Horizon Copper isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com