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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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Sylvania Platinum (LON:SLP), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Sylvania Platinum:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.029 = US$7.1m ÷ (US$258m - US$14m) (Based on the trailing twelve months to June 2024).
Therefore, Sylvania Platinum has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 8.6%.
View our latest analysis for Sylvania Platinum
Above you can see how the current ROCE for Sylvania Platinum compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Sylvania Platinum .
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Sylvania Platinum, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.9% from 16% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
The Key Takeaway
From the above analysis, we find it rather worrisome that returns on capital and sales for Sylvania Platinum have fallen, meanwhile the business is employing more capital than it was five years ago. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 71% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
If you'd like to know more about Sylvania Platinum, we've spotted 2 warning signs, and 1 of them is potentially serious.