Strategic Minerals (LON:SML) Is Experiencing Growth In Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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)

0.044 = US$536k ÷ (US$13m - US$851k) (Based on the trailing twelve months to June 2020).

So, Strategic Minerals has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 14%.

See our latest analysis for Strategic Minerals

Historical performance is a great place to start when researching a stock so above you can see the gauge for Strategic Minerals' ROCE against it's prior returns. If you're interested in investigating Strategic Minerals' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

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 4.4% on its capital. And unsurprisingly, like most companies trying to break into the black, Strategic Minerals is utilizing 423% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a related note, the company's ratio of current liabilities to total assets has decreased to 6.6%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

Our Take On Strategic Minerals' ROCE

Overall, Strategic Minerals gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with a respectable 43% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Strategic Minerals can keep these trends up, it could have a bright future ahead.

If you want to continue researching Strategic Minerals, you might be interested to know about the 5 warning signs that our analysis has discovered.

While Strategic Minerals may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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