Aya Gold & Silver (TSE:AYA) Might Have The Makings Of A Multi-Bagger

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So on that note, Aya Gold & Silver (TSE:AYA) looks quite promising in regards to its trends of return on capital.

Understanding 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 Aya Gold & Silver, this is the formula:

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

0.014 = US$1.8m ÷ (US$157m - US$24m) (Based on the trailing twelve months to December 2022).

So, Aya Gold & Silver has an ROCE of 1.4%. On its own that's a low return on capital but it's in line with the industry's average returns of 1.5%.

View our latest analysis for Aya Gold & Silver

In the above chart we have measured Aya Gold & Silver's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

Aya Gold & Silver 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 1.4% which is a sight for sore eyes. Not only that, but the company is utilizing 478% more capital than before, but that's to be expected from a company trying to break into profitability. 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 Aya Gold & Silver's ROCE

Overall, Aya Gold & Silver 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 425% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Aya Gold & Silver does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Aya Gold & Silver 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.