What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, the ROCE of AngloGold Ashanti (JSE:ANG) looks great, so lets see what the trend can tell us.
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. Analysts use this formula to calculate it for AngloGold Ashanti:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = US$1.4b ÷ (US$7.7b - US$959m) (Based on the trailing twelve months to December 2020).
So, AngloGold Ashanti has an ROCE of 21%. In absolute terms that's a very respectable return and compared to the Metals and Mining industry average of 22% it's pretty much on par.
In the above chart we have measured AngloGold Ashanti's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
AngloGold Ashanti has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 248% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Bottom Line On AngloGold Ashanti's ROCE
As discussed above, AngloGold Ashanti appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with a respectable 41% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if AngloGold Ashanti can keep these trends up, it could have a bright future ahead.
One more thing, we've spotted 2 warning signs facing AngloGold Ashanti that you might find interesting.
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