Yahoo Finance The Trend Of High Returns At Anglo Asian Mining (LON:AAZ) Has Us Very Interested
If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. And in light of that, the trends we're seeing at Anglo Asian Mining's (LON:AAZ) look very promising so lets take a look.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Anglo Asian Mining is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = US$36m ÷ (US$180m - US$20m) (Based on the trailing twelve months to December 2020).
Therefore, Anglo Asian Mining has an ROCE of 22%. In absolute terms that's a very respectable return and compared to the Metals and Mining industry average of 19% it's pretty much on par.
See our latest analysis for Anglo Asian Mining
Above you can see how the current ROCE for Anglo Asian Mining compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Anglo Asian Mining here for free.
So How Is Anglo Asian Mining's ROCE Trending?
Anglo Asian Mining has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 22% on its capital. Not only that, but the company is utilizing 28% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
On a related note, the company's ratio of current liabilities to total assets has decreased to 11%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.
The Key Takeaway
To the delight of most shareholders, Anglo Asian Mining has now broken into profitability. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing to note, we've identified 1 warning sign with Anglo Asian Mining and understanding this should be part of your investment process.
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.
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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