African Rainbow Minerals (JSE:ARI) Is Investing Its Capital With Increasing Efficiency

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. And in light of that, the trends we're seeing at African Rainbow Minerals' (JSE:ARI) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for African Rainbow Minerals:

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

0.23 = R11b ÷ (R53b - R3.4b) (Based on the trailing twelve months to June 2021).

Therefore, African Rainbow Minerals has an ROCE of 23%. On its own, that's a very good return and it's on par with the returns earned by companies in a similar industry.

See our latest analysis for African Rainbow Minerals

In the above chart we have measured African Rainbow Minerals' 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 African Rainbow Minerals here for free.

The Trend Of ROCE

The trends we've noticed at African Rainbow Minerals are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 23%. The amount of capital employed has increased too, by 58%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In Conclusion...

In summary, it's great to see that African Rainbow Minerals 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 with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

African Rainbow Minerals does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.