The Returns On Capital At Molibdenos y Metales (SNSE:MOLYMET) Don't Inspire Confidence

When researching a stock for investment, what can tell us that the company is in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Molibdenos y Metales (SNSE:MOLYMET), so let's see why.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Molibdenos y Metales is:

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

0.068 = US$76m ÷ (US$1.3b - US$202m) (Based on the trailing twelve months to December 2020).

Therefore, Molibdenos y Metales has an ROCE of 6.8%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 15%.

See our latest analysis for Molibdenos y Metales

Historical performance is a great place to start when researching a stock so above you can see the gauge for Molibdenos y Metales' ROCE against it's prior returns. If you'd like to look at how Molibdenos y Metales has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Molibdenos y Metales' ROCE Trend?

In terms of Molibdenos y Metales' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 9.4% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Molibdenos y Metales to turn into a multi-bagger.

Our Take On Molibdenos y Metales' ROCE

In summary, it's unfortunate that Molibdenos y Metales is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 60% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Molibdenos y Metales does have some risks though, and we've spotted 1 warning sign for Molibdenos y Metales that you might be interested in.

While Molibdenos y Metales 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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