Capital Allocation Trends At Mitsui Mining & Smelting (TSE:5706) Aren't Ideal

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Although, when we looked at Mitsui Mining & Smelting (TSE:5706), it didn't seem to tick all of these boxes.

What Is 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 Mitsui Mining & Smelting:

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

0.02 = JP¥8.8b ÷ (JP¥627b - JP¥188b) (Based on the trailing twelve months to December 2023).

Thus, Mitsui Mining & Smelting has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 6.0%.

View our latest analysis for Mitsui Mining & Smelting

Above you can see how the current ROCE for Mitsui Mining & Smelting 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 Mitsui Mining & Smelting for free.

So How Is Mitsui Mining & Smelting's ROCE Trending?

When we looked at the ROCE trend at Mitsui Mining & Smelting, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.0% from 8.0% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Mitsui Mining & Smelting's ROCE

Bringing it all together, while we're somewhat encouraged by Mitsui Mining & Smelting's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 108% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Like most companies, Mitsui Mining & Smelting does come with some risks, and we've found 4 warning signs that you should be aware of.

While Mitsui Mining & Smelting 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.