Strategic Minerals (LON:SML) Is Looking To Continue Growing Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Strategic Minerals (LON:SML) so let's look a bit deeper.

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

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. The formula for this calculation on Strategic Minerals is:

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

0.019 = US$279k ÷ (US$15m - US$710k) (Based on the trailing twelve months to December 2021).

So, Strategic Minerals has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 15%.

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'd like to look at how Strategic Minerals has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Strategic Minerals has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 1.9% which is a sight for sore eyes. In addition to that, Strategic Minerals is employing 439% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In Conclusion...

To the delight of most shareholders, Strategic Minerals has now broken into profitability. However the stock is down a substantial 86% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

Strategic Minerals does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are potentially serious...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.