Perseus Mining (ASX:PRU) Is Very Good At Capital Allocation

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. And in light of that, the trends we're seeing at Perseus Mining's (ASX:PRU) look very promising so lets take a look.

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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 Perseus Mining, this is the formula:

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

0.26 = US$497m ÷ (US$2.1b - US$161m) (Based on the trailing twelve months to December 2024).

Therefore, Perseus Mining has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 8.3%.

See our latest analysis for Perseus Mining

In the above chart we have measured Perseus Mining's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Perseus Mining for free.

How Are Returns Trending?

The trends we've noticed at Perseus Mining are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 26%. The amount of capital employed has increased too, by 187%. So we're very much inspired by what we're seeing at Perseus Mining thanks to its ability to profitably reinvest capital.

The Bottom Line

To sum it up, Perseus Mining 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 Perseus Mining can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Perseus Mining, we've discovered 1 warning sign that you should be aware of.

Perseus Mining 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.