Yahoo Finance What Can The Trends At Ikwezi Mining (ASX:IKW) Tell Us About Their Returns?
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There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Ikwezi Mining (ASX:IKW) looks quite promising in regards to its trends of return on capital.
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. To calculate this metric for Ikwezi Mining, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.027 = AU$576k ÷ (AU$24m - AU$2.6m) (Based on the trailing twelve months to December 2019).
Therefore, Ikwezi Mining has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 7.3%.
See our latest analysis for Ikwezi Mining
Historical performance is a great place to start when researching a stock so above you can see the gauge for Ikwezi Mining's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Ikwezi Mining, check out these free graphs here.
The Trend Of ROCE
Shareholders will be relieved that Ikwezi Mining has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 2.7% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. 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. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
The Bottom Line On Ikwezi Mining's ROCE
In summary, we're delighted to see that Ikwezi Mining has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 47% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
Ikwezi Mining does have some risks though, and we've spotted 2 warning signs for Ikwezi Mining that you might be interested in.
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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