AMG Critical Materials (AMS:AMG) Might Be Having Difficulty Using Its Capital Effectively

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at AMG Critical Materials (AMS:AMG) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is 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. The formula for this calculation on AMG Critical Materials is:

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

0.066 = US$102m ÷ (US$2.0b - US$491m) (Based on the trailing twelve months to June 2024).

Therefore, AMG Critical Materials has an ROCE of 6.6%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 8.6%.

Check out our latest analysis for AMG Critical Materials

In the above chart we have measured AMG Critical Materials' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for AMG Critical Materials .

What Can We Tell From AMG Critical Materials' ROCE Trend?

On the surface, the trend of ROCE at AMG Critical Materials doesn't inspire confidence. Around five years ago the returns on capital were 9.4%, but since then they've fallen to 6.6%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From AMG Critical Materials' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for AMG Critical Materials have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last five years have experienced a 34% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for AMG Critical Materials (of which 2 can't be ignored!) that you should know about.

While AMG Critical Materials 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.

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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.