Capital Allocation Trends At Antofagasta (LON:ANTO) Aren't Ideal

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Although, when we looked at Antofagasta (LON:ANTO), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Antofagasta:

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

0.097 = US$1.6b ÷ (US$18b - US$1.6b) (Based on the trailing twelve months to December 2022).

Therefore, Antofagasta has an ROCE of 9.7%. On its own, that's a low figure but it's around the 11% average generated by the Metals and Mining industry.

View our latest analysis for Antofagasta

Above you can see how the current ROCE for Antofagasta compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Antofagasta here for free.

SWOT Analysis for Antofagasta

What Does the ROCE Trend For Antofagasta Tell Us?

When we looked at the ROCE trend at Antofagasta, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.7% from 14% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Antofagasta's ROCE

In summary, we're somewhat concerned by Antofagasta's diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 84% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we found 3 warning signs for Antofagasta (1 is a bit concerning) you should be aware of.

While Antofagasta 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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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.