Mongolian Mining's (HKG:975) Returns On Capital Are Heading Higher

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Mongolian Mining (HKG:975) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Mongolian Mining:

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

0.052 = US$81m ÷ (US$1.7b - US$172m) (Based on the trailing twelve months to December 2020).

Thus, Mongolian Mining has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 8.5%.

View our latest analysis for Mongolian Mining

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

What Does the ROCE Trend For Mongolian Mining Tell Us?

Mongolian Mining has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 5.2% on its capital. Not only that, but the company is utilizing 61% more capital than before, but that's to be expected from a company 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 another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 9.9%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

In Conclusion...

To the delight of most shareholders, Mongolian Mining has now broken into profitability. And a remarkable 165% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Mongolian Mining does have some risks, we noticed 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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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