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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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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, Jaguar Mining (TSE:JAG) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
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 Jaguar Mining:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.087 = US$25m ÷ (US$319m - US$31m) (Based on the trailing twelve months to June 2024).
Therefore, Jaguar Mining has an ROCE of 8.7%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 3.2%.
View our latest analysis for Jaguar Mining
In the above chart we have measured Jaguar Mining's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Jaguar Mining for free.
The Trend Of ROCE
Jaguar Mining has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 8.7% which is a sight for sore eyes. In addition to that, Jaguar Mining is employing 108% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
On a related note, the company's ratio of current liabilities to total assets has decreased to 9.7%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
The Key Takeaway
Long story short, we're delighted to see that Jaguar Mining's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 222% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.