Grange Resources (ASX:GRR) Knows How To Allocate Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Grange Resources (ASX:GRR) we really liked what we saw.

What is 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 Grange Resources, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.45 = AU$436m ÷ (AU$1.1b - AU$160m) (Based on the trailing twelve months to December 2021).

Thus, Grange Resources has an ROCE of 45%. That's a fantastic return and not only that, it outpaces the average of 8.4% earned by companies in a similar industry.

See our latest analysis for Grange Resources

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Grange Resources' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Investors would be pleased with what's happening at Grange Resources. Over the last five years, returns on capital employed have risen substantially to 45%. The amount of capital employed has increased too, by 144%. So we're very much inspired by what we're seeing at Grange Resources thanks to its ability to profitably reinvest capital.

Our Take On Grange Resources' ROCE

To sum it up, Grange Resources has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 967% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing to note, we've identified 2 warning signs with Grange Resources and understanding them should be part of your investment process.

Grange Resources is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.