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There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Regis Resources (ASX:RRL), we don't think it's current trends fit the mold of a multi-bagger.
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. To calculate this metric for Regis Resources, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.016 = AU$29m ÷ (AU$2.3b - AU$449m) (Based on the trailing twelve months to December 2024).
Thus, Regis Resources has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 9.7%.
Check out our latest analysis for Regis Resources
Above you can see how the current ROCE for Regis Resources 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 Regis Resources for free.
So How Is Regis Resources' ROCE Trending?
On the surface, the trend of ROCE at Regis Resources doesn't inspire confidence. To be more specific, ROCE has fallen from 26% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a side note, Regis Resources' current liabilities have increased over the last five years to 20% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 1.6%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
Our Take On Regis Resources' ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Regis Resources. These growth trends haven't led to growth returns though, since the stock has fallen 22% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.