There are a few key trends to look for if we want to identify the next multi-bagger. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at CI Resources (ASX:CII), it didn't seem to tick all of these boxes.
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. The formula for this calculation on CI Resources is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.032 = AU$7.8m ÷ (AU$341m - AU$99m) (Based on the trailing twelve months to December 2021).
Thus, CI Resources has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 9.0%.
See our latest analysis for CI Resources
Historical performance is a great place to start when researching a stock so above you can see the gauge for CI Resources' ROCE against it's prior returns. If you'd like to look at how CI Resources has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
When we looked at the ROCE trend at CI Resources, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.2% from 14% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a side note, CI Resources' current liabilities have increased over the last five years to 29% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 3.2%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.
In Conclusion...
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for CI Resources. These growth trends haven't led to growth returns though, since the stock has fallen 33% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.