Eastern Platinum (TSE:ELR) Might Have The Makings Of A Multi-Bagger

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Eastern Platinum's (TSE:ELR) returns on capital, so let's have a 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. To calculate this metric for Eastern Platinum, this is the formula:

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

0.073 = US$6.4m ÷ (US$159m - US$72m) (Based on the trailing twelve months to June 2023).

Therefore, Eastern Platinum has an ROCE of 7.3%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 2.2%.

View our latest analysis for Eastern Platinum

Historical performance is a great place to start when researching a stock so above you can see the gauge for Eastern Platinum's ROCE against it's prior returns. If you're interested in investigating Eastern Platinum's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Eastern Platinum's ROCE Trend?

It's great to see that Eastern Platinum has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 7.3% on their capital employed. In regards to capital employed, Eastern Platinum is using 46% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 45% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

The Bottom Line

In the end, Eastern Platinum has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 66% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

Eastern Platinum does have some risks, we noticed 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.