Stock Analysis

Be Wary Of AMG Advanced Metallurgical Group (AMS:AMG) And Its Returns On Capital

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ENXTAM:AMG
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If you're looking for a multi-bagger, there's a few things to 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 AMG Advanced Metallurgical Group (AMS:AMG), it didn't seem to tick all of these boxes.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for AMG Advanced Metallurgical Group, this is the formula:

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

0.017 = US$21m ÷ (US$1.7b - US$426m) (Based on the trailing twelve months to June 2021).

So, AMG Advanced Metallurgical Group has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 13%.

See our latest analysis for AMG Advanced Metallurgical Group

roce
ENXTAM:AMG Return on Capital Employed October 7th 2021

In the above chart we have measured AMG Advanced Metallurgical Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

On the surface, the trend of ROCE at AMG Advanced Metallurgical Group doesn't inspire confidence. To be more specific, ROCE has fallen from 8.6% over the last five years. However it looks like AMG Advanced Metallurgical Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, AMG Advanced Metallurgical Group has decreased its current liabilities to 25% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On AMG Advanced Metallurgical Group's ROCE

In summary, AMG Advanced Metallurgical Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 60% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing: We've identified 2 warning signs with AMG Advanced Metallurgical Group (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

While AMG Advanced Metallurgical Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Valuation is complex, but we're helping make it simple.

Find out whether AMG Advanced Metallurgical Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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