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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Atalaya Mining (LON:ATYM) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
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 Atalaya Mining:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.043 = €24m ÷ (€653m - €103m) (Based on the trailing twelve months to September 2024).
So, Atalaya Mining has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 8.6%.
View our latest analysis for Atalaya Mining
Above you can see how the current ROCE for Atalaya Mining 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 analyst report for Atalaya Mining .
What The Trend Of ROCE Can Tell Us
In terms of Atalaya Mining's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 10% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
What We Can Learn From Atalaya Mining's ROCE
Bringing it all together, while we're somewhat encouraged by Atalaya Mining's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 114% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
Atalaya Mining does have some risks though, and we've spotted 1 warning sign for Atalaya Mining that you might be interested in.