There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of African Rainbow Minerals (JSE:ARI) looks great, so lets see what the trend can tell us.
What is 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. The formula for this calculation on African Rainbow Minerals is:
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).
So, 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.
What Does the ROCE Trend For African Rainbow Minerals Tell Us?
The trends we've noticed at African Rainbow Minerals are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 23%. Basically the business is earning more per dollar of capital invested and in addition to that, 58% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Bottom Line
To sum it up, African Rainbow Minerals has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if African Rainbow Minerals can keep these trends up, it could have a bright future ahead.
On a final note, we found 3 warning signs for African Rainbow Minerals (1 is concerning) you should be aware of.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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.
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About JSE:ARI
African Rainbow Minerals
Through its subsidiaries, operates as a diversified mining and minerals company in South Africa, Malaysia, and Switzerland.
Excellent balance sheet and fair value.
