If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think AMG Critical Materials (AMS:AMG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for AMG Critical Materials:

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

0.066 = US$102m ÷ (US$2.0b - US$491m) (Based on the trailing twelve months to June 2024).

Therefore, AMG Critical Materials has an ROCE of 6.6%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 8.3%.

Check out our latest analysis for AMG Critical Materials

In the above chart we have measured AMG Critical Materials' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for AMG Critical Materials .

What Does the ROCE Trend For AMG Critical Materials Tell Us?

In terms of AMG Critical Materials' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 9.4% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for AMG Critical Materials have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 13% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

AMG Critical Materials does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are a bit unpleasant...

While AMG Critical Materials isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.