Anglo American Platinum (JSE:AMS) Knows How To Allocate Capital Effectively

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at the ROCE trend of Anglo American Platinum (JSE:AMS) 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 Anglo American Platinum is:

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

0.31 = R38b ÷ (R177b - R57b) (Based on the trailing twelve months to June 2023).

Therefore, Anglo American Platinum has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 17%.

Check out our latest analysis for Anglo American Platinum

Above you can see how the current ROCE for Anglo American Platinum compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Anglo American Platinum's ROCE Trend?

Anglo American Platinum is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 31%. 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 96%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

Our Take On Anglo American Platinum's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Anglo American Platinum has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 75% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we found 2 warning signs for Anglo American Platinum (1 doesn't sit too well with us) you should be aware of.

Anglo American Platinum 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.