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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Having said that, from a first glance at Horizon Copper (CVE:HCU) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Understanding 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. To calculate this metric for Horizon Copper, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0013 = US$673k ÷ (US$518m - US$9.1m) (Based on the trailing twelve months to June 2024).
Thus, Horizon Copper has an ROCE of 0.1%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 0.6%.
View our latest analysis for Horizon Copper
Historical performance is a great place to start when researching a stock so above you can see the gauge for Horizon Copper's ROCE against it's prior returns. If you'd like to look at how Horizon Copper has performed in the past in other metrics, you can view this free graph of Horizon Copper's past earnings, revenue and cash flow.
How Are Returns Trending?
In terms of Horizon Copper's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.1% from 6.2% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Our Take On Horizon Copper's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Horizon Copper is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 371% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.