If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Central Asia Metals (LON:CAML) we aren’t jumping out of our chairs at how returns are trending, but let’s have a deeper look.
What Is Return On Capital Employed (ROCE)?
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Central Asia Metals:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.18 = US$78m ÷ (US$452m – US$16m) (Based on the trailing twelve months to June 2023).
Thus, Central Asia Metals has an ROCE of 18%. In absolute terms, that’s a satisfactory return, but compared to the Metals and Mining industry average of 10% it’s much better.
Above you can see how the current ROCE for Central Asia Metals 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 Central Asia Metals.
What Can We Tell From Central Asia Metals’ ROCE Trend?
Over the past five years, Central Asia Metals’ ROCE and capital employed have both remained mostly flat. It’s not uncommon to see this when looking at a mature and stable business that isn’t re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn’t expect Central Asia Metals to be a multi-bagger going forward. On top of that you’ll notice that Central Asia Metals has been paying out a large portion (73%) of earnings in the form of dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.
The Bottom Line On Central Asia Metals’ ROCE
In a nutshell, Central Asia Metals has been trudging along with the same returns from the same amount of capital over the last five years. And investors may be recognizing these trends since the stock has only returned a total of 14% to shareholders over the last five years. Therefore, if you’re looking for a multi-bagger, we’d propose looking at other options.
If you want to continue researching Central Asia Metals, you might be interested to know about the 3 warning signs that our analysis has discovered.
Source : Simplywall