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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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, China Gold International Resources (TSE:CGG) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on China Gold International Resources is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = US$120m ÷ (US$2.9b - US$341m) (Based on the trailing twelve months to December 2024).
Therefore, China Gold International Resources has an ROCE of 4.6%. In absolute terms, that's a low return but it's around the Metals and Mining industry average of 4.1%.
See our latest analysis for China Gold International Resources
Above you can see how the current ROCE for China Gold International Resources compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering China Gold International Resources for free.
What The Trend Of ROCE Can Tell Us
Shareholders will be relieved that China Gold International Resources has broken into profitability. The company now earns 4.6% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 12%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that China Gold International Resources has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.