Investors Will Want Strategic Minerals' (LON:SML) Growth In ROCE To Persist

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Strategic Minerals (LON:SML) looks quite promising in regards to its trends of return on capital.

What is 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 Strategic Minerals:

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

0.044 = US$536k ÷ (US$13m - US$851k) (Based on the trailing twelve months to June 2020).

Thus, Strategic Minerals has an ROCE of 4.4%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 14%.

View our latest analysis for Strategic Minerals

roce

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Strategic Minerals' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Strategic Minerals' ROCE Trending?

We're delighted to see that Strategic Minerals is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 4.4% on its capital. Not only that, but the company is utilizing 423% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 6.6%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line

Long story short, we're delighted to see that Strategic Minerals' reinvestment activities have paid off and the company is now profitable. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 79% return over the last five years. In light of that, we think it's worth looking further into this stock because if Strategic Minerals can keep these trends up, it could have a bright future ahead.

On a final note, we've found 4 warning signs for Strategic Minerals that we think you should be aware of.

While Strategic Minerals may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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