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If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Franco-Nevada (TSE:FNV) looks quite promising in regards to its trends of return on capital.
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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 Franco-Nevada:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$724m ÷ (US$6.3b - US$68m) (Based on the trailing twelve months to December 2024).
So, Franco-Nevada has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 3.9% generated by the Metals and Mining industry.
Check out our latest analysis for Franco-Nevada
In the above chart we have measured Franco-Nevada's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Franco-Nevada for free.
What The Trend Of ROCE Can Tell Us
Franco-Nevada has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 47% over the last five years. 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.
The Bottom Line On Franco-Nevada's ROCE
To bring it all together, Franco-Nevada has done well to increase the returns it's generating from its capital employed. Since the stock has only returned 40% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.