What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Speaking of which, we noticed some great changes in AMG Critical Materials' (AMS:AMG) returns on capital, so let's have a look.
Understanding 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. To calculate this metric for AMG Critical Materials, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.25 = US$369m ÷ (US$1.9b - US$460m) (Based on the trailing twelve months to March 2023).
So, AMG Critical Materials has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 13%.
See our latest analysis for AMG Critical Materials
Above you can see how the current ROCE for AMG Critical Materials 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 AMG Critical Materials here for free.
How Are Returns Trending?
AMG Critical Materials is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 25%. The amount of capital employed has increased too, by 70%. So we're very much inspired by what we're seeing at AMG Critical Materials thanks to its ability to profitably reinvest capital.
What We Can Learn From AMG Critical Materials' ROCE
To sum it up, AMG Critical Materials has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
On a final note, we've found 2 warning signs for AMG Critical Materials that we think you should be aware of.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.