- United Kingdom
- Metals and Mining
Returns On Capital Are A Standout For Rio Tinto Group (LON:RIO)
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. 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 Rio Tinto Group's (LON:RIO) returns on capital, so let's have a look.
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. The formula for this calculation on Rio Tinto Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = US$18b ÷ (US$97b - US$12b) (Based on the trailing twelve months to December 2022).
Thus, Rio Tinto Group has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 10%.
Check out our latest analysis for Rio Tinto Group
Above you can see how the current ROCE for Rio Tinto Group 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 Rio Tinto Group here for free.
What Does the ROCE Trend For Rio Tinto Group Tell Us?
Rio Tinto Group's ROCE growth is quite impressive. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 45% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
The Bottom Line
To sum it up, Rio Tinto Group is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a staggering 135% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Rio Tinto Group can keep these trends up, it could have a bright future ahead.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Rio Tinto Group (of which 1 is concerning!) that you should know about.
Rio Tinto Group is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
Rio Tinto Group
Rio Tinto Group engages in exploring, mining, and processing mineral resources worldwide.
Excellent balance sheet established dividend payer.