Metals Exploration (LON:MTL) Could Become A Multi-Bagger

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Metals Exploration's (LON:MTL) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Metals Exploration:

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

0.30 = US$30m ÷ (US$144m - US$41m) (Based on the trailing twelve months to December 2020).

Therefore, Metals Exploration has an ROCE of 30%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 14%.

View our latest analysis for Metals Exploration

Above you can see how the current ROCE for Metals Exploration compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

We're pretty happy with how the ROCE has been trending at Metals Exploration. The figures show that over the last five years, returns on capital have grown by 1,221%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 55% less capital than it was five years ago. Metals Exploration may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 29% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

In Conclusion...

In summary, it's great to see that Metals Exploration has been able to turn things around and earn higher returns on lower amounts of capital. Although the company may be facing some issues elsewhere since the stock has plunged 77% in the last five years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

Metals Exploration does have some risks, we noticed 6 warning signs (and 2 which can't be ignored) we think you should know about.

Metals Exploration is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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