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If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. 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 Wheaton Precious Metals (TSE:WPM) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Wheaton Precious Metals:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$738m ÷ (US$6.4b - US$22m) (Based on the trailing twelve months to June 2022).
Therefore, Wheaton Precious Metals has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 4.3% it's much better.
View our latest analysis for Wheaton Precious Metals
Above you can see how the current ROCE for Wheaton Precious Metals compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Wheaton Precious Metals.
What The Trend Of ROCE Can Tell Us
Wheaton Precious Metals' ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 118% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. 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.
What We Can Learn From Wheaton Precious Metals' ROCE
In summary, we're delighted to see that Wheaton Precious Metals has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 75% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.