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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at Wesdome Gold Mines' (TSE:WDO) ROCE trend, we were very happy with what we saw.
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 Wesdome Gold Mines, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = CA$133m ÷ (CA$685m - CA$61m) (Based on the trailing twelve months to September 2024).
Thus, Wesdome Gold Mines has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 3.3%.
Check out our latest analysis for Wesdome Gold Mines
In the above chart we have measured Wesdome Gold Mines' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Wesdome Gold Mines .
So How Is Wesdome Gold Mines' ROCE Trending?
In terms of Wesdome Gold Mines' history of ROCE, it's quite impressive. The company has consistently earned 21% for the last five years, and the capital employed within the business has risen 166% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. You'll see this when looking at well operated businesses or favorable business models.
What We Can Learn From Wesdome Gold Mines' ROCE
Wesdome Gold Mines has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And the stock has followed suit returning a meaningful 53% to shareholders over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.
While Wesdome Gold Mines looks impressive, no company is worth an infinite price. The intrinsic value infographic for WDO helps visualize whether it is currently trading for a fair price.