What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think AMG Advanced Metallurgical Group (AMS:AMG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What is it?
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 AMG Advanced Metallurgical Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = US$42m ÷ (US$1.7b - US$423m) (Based on the trailing twelve months to September 2021).
Therefore, AMG Advanced Metallurgical Group has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 13%.
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 to see what analysts are forecasting going forward, you should check out our free report for AMG Advanced Metallurgical Group.
What Can We Tell From AMG Advanced Metallurgical Group's ROCE Trend?
When we looked at the ROCE trend at AMG Advanced Metallurgical Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.6% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line On AMG Advanced Metallurgical Group's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that AMG Advanced Metallurgical Group is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 104% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.
If you want to know some of the risks facing AMG Advanced Metallurgical Group we've found 4 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.
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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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.