Investors Should Be Encouraged By Grange Resources' (ASX:GRR) Returns On Capital

What trends should we look for it we want to identify stocks that can 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. 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, the ROCE of Grange Resources (ASX:GRR) looks great, so lets see what the trend can tell us.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Grange Resources is:

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

0.35 = AU$334m ÷ (AU$1.1b - AU$115m) (Based on the trailing twelve months to June 2022).

So, Grange Resources has an ROCE of 35%. That's a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.

See our latest analysis for Grange Resources

Historical performance is a great place to start when researching a stock so above you can see the gauge for Grange Resources' ROCE against it's prior returns. If you're interested in investigating Grange Resources' past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

The trends we've noticed at Grange Resources are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 35%. The amount of capital employed has increased too, by 139%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line 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. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Grange Resources can keep these trends up, it could have a bright future ahead.

If you want to continue researching Grange Resources, you might be interested to know about the 1 warning sign that our analysis has discovered.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.