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To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Rand Mining (ASX:RND), we've spotted some signs that it could be struggling, so let's investigate.
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. To calculate this metric for Rand Mining, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = AU$11m ÷ (AU$102m - AU$2.1m) (Based on the trailing twelve months to December 2023).
Thus, Rand Mining has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.
See our latest analysis for Rand Mining
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Rand Mining has performed in the past in other metrics, you can view this free graph of Rand Mining's past earnings, revenue and cash flow.
So How Is Rand Mining's ROCE Trending?
We are a bit worried about the trend of returns on capital at Rand Mining. Unfortunately the returns on capital have diminished from the 43% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Rand Mining to turn into a multi-bagger.
Our Take On Rand Mining's ROCE
In summary, it's unfortunate that Rand Mining is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 14% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.