If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. With that in mind, the ROCE of Anglo Asian Mining (LON:AAZ) looks great, so lets see what the trend can tell us.
What is Return On Capital Employed (ROCE)?
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Anglo Asian Mining is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.21 = US$31m ÷ (US$182m – US$33m) (Based on the trailing twelve months to December 2019).
So, Anglo Asian Mining has an ROCE of 21%. In absolute terms that’s a great return and it’s even better than the Metals and Mining industry average of 12%.
In the above chart we have a measured Anglo Asian Mining’s prior ROCE against its prior performance, but the future is arguably more important. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
Shareholders will be relieved that Anglo Asian Mining has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 21%, which is always encouraging. While returns have increased, the amount of capital employed by Anglo Asian Mining has remained flat over the period. So while we’re happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you’re looking for high growth, you’ll want to see a business’s capital employed also increasing.
Our Take On Anglo Asian Mining’s ROCE
In summary, we’re delighted to see that Anglo Asian Mining has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 3,394% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it’s worth researching the company further to see if these trends are likely to persist.
Like most companies, Anglo Asian Mining does come with some risks, and we’ve found 1 warning sign that you should be aware of.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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