What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Trevali Mining (TSE:TV), we don't think it's current trends fit the mold of a multi-bagger.
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. To calculate this metric for Trevali Mining, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.092 = US$36m ÷ (US$569m - US$172m) (Based on the trailing twelve months to March 2022).
Thus, Trevali Mining has an ROCE of 9.2%. On its own that's a low return, but compared to the average of 2.5% generated by the Metals and Mining industry, it's much better.
See our latest analysis for Trevali Mining
In the above chart we have measured Trevali Mining'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 Trevali Mining here for free.
What The Trend Of ROCE Can Tell Us
Over the past five years, Trevali Mining's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Trevali Mining to be a multi-bagger going forward.
Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 30% of total assets, this reported ROCE would probably be less than9.2% because total capital employed would be higher.The 9.2% ROCE could be even lower if current liabilities weren't 30% of total assets, because the the formula would show a larger base of total capital employed. So while current liabilities isn't high right now, keep an eye out in case it increases further, because this can introduce some elements of risk.
In Conclusion...
In a nutshell, Trevali Mining has been trudging along with the same returns from the same amount of capital over the last five years. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 97% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.