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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Lundin Gold (TSE:LUG) looks great, so lets see what the trend can tell us.
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 Lundin Gold:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.41 = US$508m ÷ (US$1.4b - US$127m) (Based on the trailing twelve months to September 2024).
Therefore, Lundin Gold has an ROCE of 41%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 1.4%.
See our latest analysis for Lundin Gold
In the above chart we have measured Lundin Gold'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 Lundin Gold for free.
What Does the ROCE Trend For Lundin Gold Tell Us?
Lundin Gold has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 41% 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. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
The Bottom Line
In summary, we're delighted to see that Lundin Gold has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 276% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.