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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Andean Precious Metals (CVE:APM), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Andean Precious Metals:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$31m ÷ (US$318m - US$58m) (Based on the trailing twelve months to September 2024).
So, Andean Precious Metals has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 1.4% it's much better.
See our latest analysis for Andean Precious Metals
Above you can see how the current ROCE for Andean 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 analyst report for Andean Precious Metals .
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Andean Precious Metals doesn't inspire confidence. Over the last four years, returns on capital have decreased to 12% from 15% four years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
On a related note, Andean Precious Metals has decreased its current liabilities to 18% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
In Conclusion...
In summary, despite lower returns in the short term, we're encouraged to see that Andean Precious Metals is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 3.5% over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.