There Are Reasons To Feel Uneasy About Elemental Royalties' (CVE:ELE) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Elemental Royalties (CVE:ELE), it didn't seem to tick all of these boxes.

What is 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 Elemental Royalties is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.0092 = US$711k ÷ (US$78m - US$528k) (Based on the trailing twelve months to March 2021).

Therefore, Elemental Royalties has an ROCE of 0.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 1.2%.

See our latest analysis for Elemental Royalties

roce

In the above chart we have measured Elemental Royalties' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Elemental Royalties.

The Trend Of ROCE

We weren't thrilled with the trend because Elemental Royalties' ROCE has reduced by 88% over the last three years, while the business employed 3,067% more capital. That being said, Elemental Royalties raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Elemental Royalties might not have received a full period of earnings contribution from it.

On a side note, Elemental Royalties has done well to pay down its current liabilities to 0.7% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Elemental Royalties' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Elemental Royalties. And there could be an opportunity here if other metrics look good too, because the stock has declined 23% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Elemental Royalties does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

While Elemental Royalties isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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