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Investors Could Be Concerned With Mineral Commodities' (ASX:MRC) Returns On Capital

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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, while the ROCE is currently high for Mineral Commodities (ASX:MRC), we aren't jumping out of our chairs because returns are decreasing.

Understanding Return On Capital Employed (ROCE)

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 Mineral Commodities is:

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

0.20 = US$14m ÷ (US$86m - US$14m) (Based on the trailing twelve months to December 2020).

Thus, Mineral Commodities has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 8.3%.

View our latest analysis for Mineral Commodities

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While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Mineral Commodities, check out these free graphs here.

So How Is Mineral Commodities' ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 38% five years ago, while the business's capital employed increased by 105%. That being said, Mineral Commodities raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Mineral Commodities' earnings and if they change as a result from the capital raise.

The Bottom Line

To conclude, we've found that Mineral Commodities is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 93% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing: We've identified 4 warning signs with Mineral Commodities (at least 1 which is a bit concerning) , and understanding them would certainly be useful.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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