Minto Metals (CVE:MNTO) Could Become A Multi-Bagger
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Minto Metals (CVE:MNTO) we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
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 Minto Metals is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = CA$13m ÷ (CA$159m - CA$98m) (Based on the trailing twelve months to September 2022).
So, Minto Metals has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 1.2% earned by companies in a similar industry.
View our latest analysis for Minto Metals
Historical performance is a great place to start when researching a stock so above you can see the gauge for Minto Metals' ROCE against it's prior returns. If you'd like to look at how Minto Metals has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Minto Metals Tell Us?
Shareholders will be relieved that Minto Metals has broken into profitability. The company was generating losses two years ago, but has managed to turn it around and as we saw earlier is now earning 21%, which is always encouraging. While returns have increased, the amount of capital employed by Minto Metals has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 62% of the business, which is more than it was two years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
What We Can Learn From Minto Metals' ROCE
To sum it up, Minto Metals is collecting higher returns from the same amount of capital, and that's impressive. Given the stock has declined 44% in the last year, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Minto Metals (of which 1 doesn't sit too well with us!) that you should know about.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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