Should You Be Excited About Grange Resources' (ASX:GRR) Returns On Capital?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. 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)

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. 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)

0.28 = AU$224m ÷ (AU$874m - AU$84m) (Based on the trailing twelve months to December 2020).

Thus, Grange Resources has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 12%.

Check out 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.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Grange Resources is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 28% on its capital. In addition to that, Grange Resources is employing 159% more capital than previously which is expected of a company that's 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.

The Key Takeaway

Long story short, we're delighted to see that Grange Resources' reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 765% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.

One more thing, we've spotted 2 warning signs facing Grange Resources that you might find interesting.

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. 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.
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