Why We Like The Returns At Metals Exploration (LON:MTL)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing 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.

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 Metals Exploration, this is the formula:

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

0.37 = US$35m ÷ (US$134m - US$39m) (Based on the trailing twelve months to June 2021).

Therefore, Metals Exploration has an ROCE of 37%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 18%.

View our latest analysis for Metals Exploration

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Metals Exploration's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Metals Exploration Tell Us?

It's great to see that Metals Exploration has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 37% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 52% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

What We Can Learn From Metals Exploration's ROCE

In a nutshell, we're pleased to see that Metals Exploration has been able to generate higher returns from less capital. Although the company may be facing some issues elsewhere since the stock has plunged 74% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

If you'd like to know more about Metals Exploration, we've spotted 3 warning signs, and 1 of them is significant.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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.

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