What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Perseus Mining (ASX:PRU) so let's look a bit deeper.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Perseus Mining:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = AU$366m ÷ (AU$2.1b - AU$156m) (Based on the trailing twelve months to December 2022).
Thus, Perseus Mining has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 11% generated by the Metals and Mining industry.
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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
SWOT Analysis for Perseus Mining
- Earnings growth over the past year exceeded the industry.
- Currently debt free.
- Dividends are covered by earnings and cash flows.
- Earnings growth over the past year is below its 5-year average.
- Dividend is low compared to the top 25% of dividend payers in the Metals and Mining market.
- Trading below our estimate of fair value by more than 20%.
- Annual earnings are forecast to decline for the next 3 years.
What Can We Tell From Perseus Mining's ROCE Trend?
The fact that Perseus Mining is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 19% on its capital. And unsurprisingly, like most companies trying to break into the black, Perseus Mining is utilizing 140% more capital than it was five years ago. 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.
What We Can Learn From Perseus Mining's ROCE
In summary, it's great to see that Perseus Mining has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 330% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.
Perseus Mining does have some risks though, and we've spotted 1 warning sign for Perseus Mining that you might be interested in.
While Perseus Mining may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
Valuation is complex, but we're helping make it simple.
Find out whether Perseus Mining is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.