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What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Empress Royalty (CVE:EMPR) so let's look a bit deeper.
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 Empress Royalty:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.075 = US$1.5m ÷ (US$24m - US$3.9m) (Based on the trailing twelve months to September 2024).
Therefore, Empress Royalty has an ROCE of 7.5%. On its own that's a low return, but compared to the average of 1.8% generated by the Metals and Mining industry, it's much better.
Check out our latest analysis for Empress Royalty
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're interested in investigating Empress Royalty's past further, check out this free graph covering Empress Royalty's past earnings, revenue and cash flow.
What Can We Tell From Empress Royalty's ROCE Trend?
Empress Royalty has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses four years ago, but now it's earning 7.5% which is a sight for sore eyes. In addition to that, Empress Royalty is employing 1,569% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
The Key Takeaway
In summary, it's great to see that Empress Royalty has managed to break into profitability and is continuing to reinvest in its business. And with a respectable 24% awarded to those who held the stock over the last three years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.