Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount 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. So on that note, Aya Gold & Silver (TSE:AYA) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Aya Gold & Silver is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.022 = US$1.6m ÷ (US$82m – US$7.6m) (Based on the trailing twelve months to March 2021).
So, Aya Gold & Silver has an ROCE of 2.2%. In absolute terms, that’s a low return, but it’s much better than the Metals and Mining industry average of 0.8%.
Above you can see how the current ROCE for Aya Gold & Silver 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 Aya Gold & Silver here for free.
So How Is Aya Gold & Silver’s ROCE Trending?
Aya Gold & Silver has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 2.2% on its capital. Not only that, but the company is utilizing 314% more capital than before, but that’s to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
On a related note, the company’s ratio of current liabilities to total assets has decreased to 9.3%, which basically reduces it’s funding from the likes of short-term creditors or suppliers. This tells us that Aya Gold & Silver has grown its returns without a reliance on increasing their current liabilities, which we’re very happy with.
In summary, it’s great to see that Aya Gold & Silver has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing: We’ve identified 4 warning signs with Aya Gold & Silver (at least 1 which is significant) , and understanding them would certainly be useful.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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