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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So on that note, Goldmoney (TSE:XAU) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Goldmoney, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = CA$24m ÷ (CA$196m - CA$10m) (Based on the trailing twelve months to September 2024).
Thus, Goldmoney has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Specialty Retail industry average of 11%.
Check out our latest analysis for Goldmoney
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Goldmoney.
What The Trend Of ROCE Can Tell Us
We're delighted to see that Goldmoney is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 13% on its capital. While returns have increased, the amount of capital employed by Goldmoney has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.
What We Can Learn From Goldmoney's ROCE
To bring it all together, Goldmoney has done well to increase the returns it's generating from its capital employed. Given the stock has declined 23% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
If you want to know some of the risks facing Goldmoney we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.