Investors Could Be Concerned With Regis Resources' (ASX:RRL) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Regis Resources (ASX:RRL) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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 Regis Resources is:

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

0.0058 = AU$12m ÷ (AU$2.3b - AU$146m) (Based on the trailing twelve months to December 2023).

Thus, Regis Resources has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 11%.

See our latest analysis for Regis Resources

In the above chart we have measured Regis Resources' 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 Regis Resources for free.

So How Is Regis Resources' ROCE Trending?

In terms of Regis Resources' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 30% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Regis Resources' ROCE

To conclude, we've found that Regis Resources is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 51% in the last five years. Therefore based on the analysis done in this article, we don't think Regis Resources has the makings of a multi-bagger.

Regis Resources could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for RRL on our platform quite valuable.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.