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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? 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. And in light of that, the trends we're seeing at Serabi Gold's (LON:SRB) look very promising so lets take a look.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Serabi Gold is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.20 = US$22m ÷ (US$127m - US$17m) (Based on the trailing twelve months to September 2024).
Thus, Serabi Gold has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 8.3%.
Check out our latest analysis for Serabi Gold
Above you can see how the current ROCE for Serabi Gold compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Serabi Gold for free.
What The Trend Of ROCE Can Tell Us
Serabi Gold is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 20%. The amount of capital employed has increased too, by 58%. So we're very much inspired by what we're seeing at Serabi Gold thanks to its ability to profitably reinvest capital.
On a related note, the company's ratio of current liabilities to total assets has decreased to 13%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
The Key Takeaway
In summary, it's great to see that Serabi Gold can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 129% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.