Here are some key trends to watch if we want to identify the next multi-bagger. First, we would like to see a proven Return on capital employed (ROCE) which is increasing, and second, an expansion base of capital employed. Ultimately, it shows that this is a business that is reinvesting profits at increasing rates of return. so when we saw Orient Mining (STO:AUR), they have a high ROCE, but we weren’t quite excited about how the returns are trending.
Return on Capital Employed (ROCE): What is it?
Just to clarify if you’re unsure, ROCE is a metric to evaluate how much pre-tax income (in percentage terms) a company makes on capital invested in its business. To calculate this metric for Orient Mining, this is the formula:
Return on Capital Employed = Earnings Before Interest and Taxes (EBIT) (Total Assets – Current Liabilities)
0.25 = US$12m (US$68m – US$20m) (Based on last twelve months to December 2021),
therefore, Orient Mining has a ROCE of 25%. This is a great return and not only that, it is higher than the average 13% earned by companies in the same industry.
View our latest analysis for Orient Mining
Above you can see how the current ROCE for Orient Mining compares to its prior return on capital, but there’s only so much you can tell from the past. If you want to see what analysts are forecasting next, you should check out our free Report for Orient Mining
So how is Orient Mining’s ROCE trending?
When we saw the ROCE trend at Orient Mining, we didn’t believe much. While it is comforting that the ROCE is high, it was 46% five years ago. Given that the business is infusing more capital while revenues have slipped, this is a bit worrying. If this continues, you may be looking at a company that is trying to reinvest for growth, but is actually losing market share because sales haven’t grown.
On a side note, Orient Mining has done well to pay off its current liabilities of up to 29% of total assets. So we can link some of this to a reduction in ROCE. This effectively means that their suppliers or short-term creditors are funding the business less, which reduces some of the element of risk. Some claim that this reduces the business’s efficiency in generating ROCE because it is now funding more operations from its own money.
From the above analysis, we find it worrying that returns on capital and sales for Orient Mining have fallen, meanwhile the business is injecting more capital than it did five years ago. Investors didn’t like these developments, as the stock is down 53% from where it was five years ago. With underlying trends that aren’t great in these areas, we’ll consider looking elsewhere.
If you want to know some of the risks faced by Orient Mining we have found 4 warning signs (1 is related!) that you should know before investing here.
If you want to see other companies earning higher returns, check out our free Here’s a list of companies earning high returns with solid balance sheets.
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