Why We Like The Returns At AMG Critical Materials (AMS:AMG)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of AMG Critical Materials (AMS:AMG) we really liked what we saw.

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

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

0.25 = US$385m ÷ (US$2.0b - US$456m) (Based on the trailing twelve months to June 2023).

Therefore, AMG Critical Materials has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 12%.

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, you can check out the forecasts from the analysts covering AMG Critical Materials here for free.

How Are Returns Trending?

AMG Critical Materials is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 25%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 76%. So we're very much inspired by what we're seeing at AMG Critical Materials thanks to its ability to profitably reinvest capital.

In Conclusion...

To sum it up, AMG Critical Materials has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has fallen 17% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a separate note, we've found 3 warning signs for AMG Critical Materials you'll probably want to know about.

AMG Critical Materials is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.