Alamos Gold's (TSE:AGI) Returns On Capital Are Heading Higher

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. With that in mind, we've noticed some promising trends at Alamos Gold (TSE:AGI) so let's look a bit deeper.

Understanding 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. The formula for this calculation on Alamos Gold is:

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

0.043 = US$150m ÷ (US$3.7b - US$182m) (Based on the trailing twelve months to December 2022).

So, Alamos Gold has an ROCE of 4.3%. On its own that's a low return, but compared to the average of 1.5% generated by the Metals and Mining industry, it's much better.

View our latest analysis for Alamos Gold

Above you can see how the current ROCE for Alamos Gold compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Alamos Gold here for free.

The Trend Of ROCE

While there are companies with higher returns on capital out there, we still find the trend at Alamos Gold promising. The figures show that over the last five years, ROCE has grown 145% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

Our Take On Alamos Gold's ROCE

To bring it all together, Alamos Gold has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 155% 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 Alamos Gold can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 2 warning signs with Alamos Gold and understanding these should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.