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What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Central Asia Metals (LON:CAML) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Central Asia Metals is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$67m ÷ (US$448m - US$16m) (Based on the trailing twelve months to June 2024).
Thus, Central Asia Metals has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 8.6% it's much better.
Check out our latest analysis for Central Asia Metals
In the above chart we have measured Central Asia Metals' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Central Asia Metals .
What Can We Tell From Central Asia Metals' ROCE Trend?
Things have been pretty stable at Central Asia Metals, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Central Asia Metals to be a multi-bagger going forward. That probably explains why Central Asia Metals has been paying out 72% of its earnings as dividends to shareholders. These mature businesses typically have reliable earnings and not many places to reinvest them, so the next best option is to put the earnings into shareholders pockets.
Our Take On Central Asia Metals' ROCE
In summary, Central Asia Metals isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 2.8% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.