Perseus Mining (ASX:PRU) Knows How To Allocate Capital Effectively

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Perseus Mining's (ASX:PRU) look very promising so lets take a look.

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. 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)

0.25 = AU$567m ÷ (AU$2.4b - AU$172m) (Based on the trailing twelve months to June 2023).

Thus, Perseus Mining has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 9.1%.

Check out our latest analysis for Perseus Mining

Above you can see how the current ROCE for Perseus Mining compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Perseus Mining.

So How Is Perseus Mining's ROCE Trending?

Perseus 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 25% which is a sight for sore eyes. In addition to that, Perseus Mining is employing 171% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

What We Can Learn From Perseus Mining's ROCE

Overall, Perseus 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. And a remarkable 366% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we've found 1 warning sign for Perseus Mining that we think you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.