There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Ikwezi Mining (ASX:IKW) so let's look a bit deeper.
What is 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. Analysts use this formula to calculate it for Ikwezi Mining:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.055 = AU$1.2m ÷ (AU$28m - AU$6.9m) (Based on the trailing twelve months to December 2020).
Therefore, Ikwezi Mining has an ROCE of 5.5%. On its own that's a low return, but compared to the average of 1.0% generated by the Oil and Gas industry, it's much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Ikwezi Mining's ROCE against it's prior returns. If you're interested in investigating Ikwezi Mining's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Ikwezi Mining's ROCE Trending?
Ikwezi Mining has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 5.5% which is a sight for sore eyes. Not only that, but the company is utilizing 57% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 24% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
Our Take On Ikwezi Mining's ROCE
Overall, Ikwezi Mining gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Given the stock has declined 45% 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.
If you want to know some of the risks facing Ikwezi Mining we've found 2 warning signs (1 is significant!) that you should be aware of before investing here.
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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