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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at TRX Gold (TSE:TRX) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for TRX Gold, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$8.7m ÷ (US$93m - US$22m) (Based on the trailing twelve months to May 2024).
Thus, TRX Gold has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 3.7% generated by the Metals and Mining industry.
See our latest analysis for TRX Gold
Above you can see how the current ROCE for TRX Gold 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 TRX Gold .
How Are Returns Trending?
The fact that TRX Gold is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 12% which is a sight for sore eyes. Not only that, but the company is utilizing 118% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
What We Can Learn From TRX Gold's ROCE
Long story short, we're delighted to see that TRX Gold's reinvestment activities have paid off and the company is now profitable. Given the stock has declined 49% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.
While TRX Gold looks impressive, no company is worth an infinite price. The intrinsic value infographic for TRX helps visualize whether it is currently trading for a fair price.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.