Investors Will Want Eldorado Gold's (TSE:ELD) Growth In ROCE To Persist

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Eldorado Gold (TSE:ELD) 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. The formula for this calculation on Eldorado Gold is:

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

0.061 = US$320m ÷ (US$5.6b - US$351m) (Based on the trailing twelve months to September 2024).

Thus, Eldorado Gold has an ROCE of 6.1%. On its own that's a low return, but compared to the average of 3.4% generated by the Metals and Mining industry, it's much better.

Check out our latest analysis for Eldorado Gold

In the above chart we have measured Eldorado Gold's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Eldorado Gold .

What Does the ROCE Trend For Eldorado Gold Tell Us?

The fact that Eldorado Gold 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 6.1% on its capital. In addition to that, Eldorado Gold is employing 20% more capital than previously which is expected of a company that's 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.

Our Take On Eldorado Gold's ROCE

To the delight of most shareholders, Eldorado Gold has now broken into profitability. Since the stock has returned a staggering 119% 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 Eldorado Gold can keep these trends up, it could have a bright future ahead.

Eldorado Gold does have some risks though, and we've spotted 2 warning signs for Eldorado Gold that you might be interested in.

While Eldorado Gold 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.

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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.