Investors Could Be Concerned With Anglo Asian Mining's (LON:AAZ) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Anglo Asian Mining (LON:AAZ), it didn't seem to tick all of these boxes.

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. To calculate this metric for Anglo Asian Mining, this is the formula:

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

0.023 = US$3.7m ÷ (US$180m - US$16m) (Based on the trailing twelve months to June 2023).

Thus, Anglo Asian Mining has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 7.6%.

View our latest analysis for Anglo Asian Mining

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Anglo Asian Mining, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 2.3%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Anglo Asian Mining has done well to pay down its current liabilities to 8.9% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Anglo Asian Mining's ROCE

To conclude, we've found that Anglo Asian Mining is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 12% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Anglo Asian Mining does have some risks, we noticed 5 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

While Anglo Asian Mining 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.