Stock Analysis

The Returns On Capital At AMG Advanced Metallurgical Group (AMS:AMG) Don't Inspire Confidence

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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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating AMG Advanced Metallurgical Group (AMS:AMG), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for AMG Advanced Metallurgical Group:

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

0.0054 = US$6.0m ÷ (US$1.5b - US$383m) (Based on the trailing twelve months to March 2021).

Thus, AMG Advanced Metallurgical Group has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 8.7%.

Check out our latest analysis for AMG Advanced Metallurgical Group

ENXTAM:AMG Return on Capital Employed June 21st 2021

Above you can see how the current ROCE for AMG Advanced Metallurgical 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 AMG Advanced Metallurgical Group here for free.

What Can We Tell From AMG Advanced Metallurgical Group's ROCE Trend?

In terms of AMG Advanced Metallurgical Group's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 8.1%, but since then they've fallen to 0.5%. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

The Key Takeaway

In summary, we're somewhat concerned by AMG Advanced Metallurgical Group's diminishing returns on increasing amounts of capital. Since the stock has skyrocketed 157% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for AMG Advanced Metallurgical Group (of which 1 is a bit unpleasant!) that you should know about.

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