Yahoo Finance CI Resources (ASX:CII) Has Some Difficulty Using Its Capital Effectively
When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. So after we looked into CI Resources (ASX:CII), the trends above didn't look too great.
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 CI Resources is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.036 = AU$8.3m ÷ (AU$252m - AU$22m) (Based on the trailing twelve months to December 2020).
Therefore, CI Resources has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 8.9%.
See our latest analysis for CI Resources
Historical performance is a great place to start when researching a stock so above you can see the gauge for CI Resources' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of CI Resources, check out these free graphs here.
What Can We Tell From CI Resources' ROCE Trend?
In terms of CI Resources' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 24%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect CI Resources to turn into a multi-bagger.
The Bottom Line On CI Resources' ROCE
In summary, it's unfortunate that CI Resources is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 39% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
CI Resources does have some risks, we noticed 4 warning signs (and 2 which are a bit concerning) we think you should know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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