Capital Allocation Trends At Centamin (LON:CEY) Aren't Ideal
What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Centamin (LON:CEY), the trends above didn't look too great.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Centamin is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$193m ÷ (US$1.5b - US$84m) (Based on the trailing twelve months to June 2023).
So, Centamin has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.2% generated by the Metals and Mining industry.
View our latest analysis for Centamin
Above you can see how the current ROCE for Centamin compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Centamin.
What Does the ROCE Trend For Centamin Tell Us?
In terms of Centamin's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 20%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Centamin becoming one if things continue as they have.
The Bottom Line
In summary, it's unfortunate that Centamin is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 4.5% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
On a final note, we've found 2 warning signs for Centamin that we think you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
