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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Horizon Copper (CVE:HCU) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Horizon Copper:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0063 = US$3.2m ÷ (US$519m - US$12m) (Based on the trailing twelve months to September 2024).
So, Horizon Copper has an ROCE of 0.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 1.1%.
View our latest analysis for Horizon Copper
Above you can see how the current ROCE for Horizon Copper 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 analyst report for Horizon Copper .
How Are Returns Trending?
In terms of Horizon Copper's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 57%, but since then they've fallen to 0.6%. 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. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, Horizon Copper has done well to pay down its current liabilities to 2.4% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
In Conclusion...
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 long term investors must be optimistic going forward because the stock has returned a huge 336% to shareholders in the last five years. 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.