Home Factor company Centamin (LON:CEY) could risk shrinking as a business

Centamin (LON:CEY) could risk shrinking as a business

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What financial indicators can tell us that a company is maturing or even declining? When we see a decline come back on capital employed (ROCE) in connection with a decrease base capital employed, this is often how a mature company shows signs of aging. This indicates that the company is getting less profit from its investments and its total assets are decreasing. And from a first reading, things don’t look very good to centamine (LON:CEY), so let’s see why.

Return on capital employed (ROCE): what is it?

For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. The formula for this calculation on Centamin is:

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

0.11 = $148 million ÷ ($1.4 billion – $81 million) (Based on the last twelve months to December 2021).

Therefore, Centamin has a ROCE of 11%. On its own, that’s a pretty standard return, but compared to the 15% metals and mining industry average, it’s not nearly as good.

See our latest review for Centamin

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In the chart above, we measured Centamin’s past ROCE against its past performance, but the future is arguably more important. If you want, you can check out analyst forecasts covering Centamin here for free.

What is the return trend?

We are a bit worried about the trend of capital returns at Centamin. To be more precise, the ROCE was 19% five years ago, but since then it has fallen significantly. Meanwhile, the capital employed in the company remained roughly stable over the period. This combination may be a sign of a mature business that still has areas to deploy capital, but the returns received are not as high due potentially to new competition or lower margins. If these trends continue, we don’t expect Centamin to become a multi-bagger.

The essentials of Centamin’s ROCE

Overall, lower returns from the same amount of capital employed are not exactly signs of a compounding machine. Investors did not like these developments, as the stock fell 34% from five years ago. That being the case, unless the underlying trends return to a more positive trajectory, we would consider looking elsewhere.

One last note, you should inquire about the 2 warning signs we spotted with Centamin (including 1 that makes us a little uncomfortable).

Although Centamin does not generate the highest yield, check out this free list of companies that achieve high returns on equity with strong balance sheets.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.