Is Anglo American Platinum (JSE:AMS) The Next Multi-Bagger?

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at Anglo American Platinum's (JSE:AMS) look very promising so lets take a look.

Return On Capital Employed (ROCE): What is it?

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 Anglo American Platinum:

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

0.39 = R38b ÷ (R144b - R47b) (Based on the trailing twelve months to December 2020).

So, Anglo American Platinum has an ROCE of 39%. That's a fantastic return and not only that, it outpaces the average of 24% earned by companies in a similar industry.

See 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'd like to see what analysts are forecasting going forward, you should check out our free report for Anglo American Platinum.

The Trend Of ROCE

Anglo American Platinum is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 39%. The amount of capital employed has increased too, by 58%. So we're very much inspired by what we're seeing at Anglo American Platinum thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 32% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

What We Can Learn From Anglo American Platinum's ROCE

In summary, it's great to see that Anglo American Platinum can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 541% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Anglo American Platinum can keep these trends up, it could have a bright future ahead.

On a final note, we found 2 warning signs for Anglo American Platinum (1 makes us a bit uncomfortable) you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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This article by Simply Wall St is general in nature. 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.
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