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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Mountain Province Diamonds (TSE:MPVD) and its trend of ROCE, we really liked what we saw.
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 Mountain Province Diamonds:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = CA$40m ÷ (CA$872m - CA$74m) (Based on the trailing twelve months to September 2024).
Therefore, Mountain Province Diamonds has an ROCE of 5.0%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 3.3%.
View our latest analysis for Mountain Province Diamonds
Historical performance is a great place to start when researching a stock so above you can see the gauge for Mountain Province Diamonds' ROCE against it's prior returns. If you're interested in investigating Mountain Province Diamonds' past further, check out this free graph covering Mountain Province Diamonds' past earnings, revenue and cash flow.
How Are Returns Trending?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The figures show that over the last five years, ROCE has grown 296% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
Our Take On Mountain Province Diamonds' ROCE
To sum it up, Mountain Province Diamonds is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has dived 93% over the last five years, there may be other factors affecting the company's prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.