Returns At Strategic Minerals (LON:SML) Are On The Way Up

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. 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 Strategic Minerals' (LON:SML) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

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 Strategic Minerals:

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

0.033 = US$461k ÷ (US$15m - US$474k) (Based on the trailing twelve months to June 2021).

So, Strategic Minerals has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 17%.

Check out our latest analysis for Strategic Minerals

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 Strategic Minerals' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

The fact that Strategic Minerals is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 3.3% on its capital. And unsurprisingly, like most companies trying to break into the black, Strategic Minerals is utilizing 1,036% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, Strategic Minerals has decreased current liabilities to 3.3% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Strategic Minerals has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Strategic Minerals' ROCE

Long story short, we're delighted to see that Strategic Minerals' reinvestment activities have paid off and the company is now profitable. Although the company may be facing some issues elsewhere since the stock has plunged 76% 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.

If you want to know some of the risks facing Strategic Minerals we've found 5 warning signs (1 is significant!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.