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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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Majestic Gold (CVE:MJS) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Majestic Gold:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$26m ÷ (US$195m - US$20m) (Based on the trailing twelve months to September 2024).
Therefore, Majestic Gold has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 3.7% it's much better.
View our latest analysis for Majestic Gold
Historical performance is a great place to start when researching a stock so above you can see the gauge for Majestic Gold's ROCE against it's prior returns. If you're interested in investigating Majestic Gold's past further, check out this free graph covering Majestic Gold's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
The trends we've noticed at Majestic Gold are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 15%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 81%. So we're very much inspired by what we're seeing at Majestic Gold thanks to its ability to profitably reinvest capital.
Our Take On Majestic Gold's ROCE
All in all, it's terrific to see that Majestic Gold is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.